In his first speech as Reserve Bank governor, Philip Lowe says the RBA’s monetary policy is still accommodative and its “flexible medium-term inflation target remains the right monetary policy framework for Australia”.
Mr Lowe told a parliamentary standing committee that despite recent commentary questioning monetary policy frameworks, the current framework had “served Australia very well” and provided the community with a “reasonable degree of certainty about how the average level of prices is likely to change through time”.
The governor said that having previously eased monetary policy in the bank’s May and August meetings (with the cash rate currently at 1.5 per cent), an unchanged policy stance would be consistent with sustainable growth in the economy and achieving the inflation target over time.
Mr Lowe added that it was in the public’s best interest that the RBA ensured it delivered an average rate of inflation in Australia between 2 and 3 per cent over time, and it pursued its objective in a way that “preserves financial stability”.
“We’re not inflation nutters”
“We’ve not seen our job as trying to keep inflation always within a very tight, narrow range. We’re not being what some have called ‘inflation nutters’,” he said. “We’ve had a more balanced perspective, recognising that some degree of variability in inflation from year to year is both inevitable and appropriate.”
Mr Lowe said one issue the RBA discussed internally was how quickly the Australian economy should get back to the 2 to 3 per cent range on inflation. He said that while the country could achieve this quite quickly, it could be at the cost of “a deterioration in broad financial stability” and such a move “wouldn’t be consistent with [the RBA’s] mandate of doing what’s in the best interests of the Australian people”.
Meanwhile, drafting changes were also made to the bank’s statement with regard to linking monetary policy and financial stability, which were dealt with separately in the past.
The governor said that while the new statement “represents continuity with the previous statements”, financial stability considerations over the years had been a factor in the RBA’s deliberations. He added the revised drafting recognised that the inflation target was pursued in the context of the bank’s broader objectives, including financial stability.
“While there are arguments for other types of arrangements, none of them are sufficiently strong to move away from the current framework that has helped promote both stability and confidence in the Australian economy for more than two decades,” Mr Lowe said.
“Our judgement then is that a flexible medium-term inflation target remains the right monetary policy framework for Australia.”
[Related: ANZ cash rate set to hold]