Tuesday, February 7, 2012

Reserve Bank Prediction - Hold Interest rates at 4.25%

I have been doing some modelling to determine if I can accurately predict the Reserve Banks intentions regarding the cash rate.
Based on Historical time series data, I have come up with the following factors that affect interest rates :-

1. 1 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates)
2. 2 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates)
3. Previous two Reserve Bank decisions on Interest rates (increase puts positive pressure on interest rates)
4. Commodity prices (increase puts negative pressure on interest rates)
5. Unemployment (increase puts negative pressure on interest rates)

Based on todays data, while there was an decrease in Interest rates last December by the reserve, the fact that the last two months spread change on Government bonds vs index bonds were both "+" and commodity prices have been decreasing and unemployment stationary would indicate that the Reserve Bank will hold interest rates at 4.25%

We shall see.

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