RBA needs to reconsider 2–3% inflation target: Bouris

This month, the Reserve Bank of Australia made its 10th consecutive interest rate hikes, taking the official cash rate to 3.6 per cent. The RBA has repeatedly argued that rates will need to rise until inflation is back down within its target band of between two and three per cent.

But according to mortgage industry veteran Mark Bouris, the world has changed since the pandemic and the target inflation range needs to change, too.

Speaking on the Mortgage Business Spotlight podcast this week, Mr Bouris said he finds the current policy setting alarming.

“What’s bothering me is not the current 7 per cent inflation figure, but that we’re trying to get ourselves down to a 2–3 per cent given what we’ve just gone through and the amount of money that was dropped into our economy over the last three years,” he said.

“I’m more alarmed about policy setting. We should review that 2–3 per cent band as more of a midterm or a medium-term goal and not a near-term goal.”

Mr Bouris said a better goal would be for the inflation range to match wages growth to keep the standard of living stable.

“If wages are increasing at an annual rate of somewhere between 3 and a half and 4 per cent, then I suggest that the inflation number that we should be chasing, that is the trimmed mean inflation or the adjusted inflation, should be somewhere close to what the wage price increase is. So that what we are trying to achieve here is no reduction in the standard of living of Australians. That’s all we should be interested in, policy-wise,” he said.

Annual wage growth is currently at 3.3 per cent, according to the December quarter figures released by the ABS.

In his speech at the Australian Financial Review Business Summit on Wednesday (8 March), Reserve Bank governor Philip Lowe said the central bank is “resolute” in its determination to ensure that inflation in Australia returns to the 2–3 per cent target range.

“High inflation is corrosive and damaging. If it were to persist, it would require even higher interest rates and more unemployment to bring it back down. So, it would be dangerous indeed to allow the current period of high inflation to continue. The RBA’s job, as Australia’s central bank, is to deliver low and stable inflation,” he said.

However, Mr Bouris believes interest rates are a blunt instrument that can do more harm than good.

“Instead of taking us through nice and gently and giving us the soft landing that everybody likes to be referring to, we have Thor’s hammer smashing the crap out of us,” he said.

You can listen to the full Mortgage Business Spotlight podcast with Mark Bouris, here:

[Related: End of rate hikes in sight, says RBA]