Reserve Bank governor Philip Lowe has doubled down on the value of targeting consumer price rises and said there could be more harm than good from lowering the RBA’s target range.
- RBA governor Philip Lowe says the board is prepared to cut interest rates further if the economy does not grow fast enough
- Even if it does not cut rates, Mr Lowe said “it is reasonable to expect an extended period of low interest rates”
- The RBA believes that greater participation in the labour market is a key factor keeping wages growth and inflation low
Ahead of Mr Lowe’s speech at the annual Annika Foundation lunch in Sydney today, there was some anticipation that he may relax the RBA’s commitment to its current 2-3 per cent inflation target, which is a little higher than targets in many other developed economies.
“Lowering the target might have the short-run advantage of allowing us to say we have achieved our goal, but shifting the goalposts hardly seems a good way to build long-term credibility,” he told the annual Annika Foundation lunch in Sydney.
“Shifting the goalposts could also entrench a low-inflation mindset.”
Aside from that, Mr Lowe argued changing a long-standing framework could be counterproductive for the economy.
“A high degree of uncertainty about future inflation hurts both investment and jobs. The economy works best if there is a degree of predictability,” he said.
The RBA boss was keen to qualify that statement by saying, “we are not inflation nutters” but instead seek “to deliver low and stable inflation in a way that maximises the welfare of our society.”
In the current context of inflation that has been below target for essentially all of his nearly three-year tenure so far, with unemployment showing early signs of rising amidst a steep home building downturn, Mr Lowe explicitly said further interest rate cuts are possible.
“If demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” he said.
“However, as I have discussed on other occasions, other arms of public policy could also play a role in this scenario.”
Record participation rate caught RBA forecasters off guard
Even if interest rates do not fall further from here, Mr Lowe assured Australian borrowers that they need not fear rate rises in the foreseeable future.
“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates,” he said.
“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”
As for why inflation has remained stubbornly low even over the previous couple of years when jobs growth had been very strong, Mr Lowe explained that the record share of people in work or looking for it had caught the bank’s forecasters off guard.
“When we prepared our forecasts in mid-2017, we did so on the basis that the share of the adult population participating in the labour market (the participation rate) would remain steady over the next couple of years,” he said.
“At the time, this was considered a reasonable forecast: while we expected some increase in participation from an encouraged worker effect because of solid employment growth, we thought this would be offset by the ageing of the population.
“Employment growth has been much stronger than expected and the participation rate has risen by 1.5 percentage points, which is a large change over a fairly short period.
“Put simply, the strong demand for labour has been met by more labour supply.”
That, in turn, means unemployment has remained above 5 per cent, underemployment has stubbornly held near record high levels and wages growth has therefore only picked up very modestly.
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