Reserve Bank President Philip Lowe confirmed the central bank’s consumer price index rising target, saying that if inflation is lower than the central bank’s target range, the disadvantages are greater.
Before Roy’s speech at the annual Annika Foundation lunch in Sydney today, it was speculated that he would relax the central bank’s current 2-3% inflation target, which is slightly higher than many developed countries.
“Reducing the target may bring us short-term benefits, but it is not helpful for building long-term credibility,” he said at the Foundation’s luncheon.
“Reducing the goal may lead to a low inflation mindset.”
In addition, Dr. Lowe also said that changing a long-term framework may have a negative impact on economic development.
“A high degree of uncertainty about future inflation will undermine investment and employment. The economy works best with some predictability.”
“We are not inflation madmen,” we just want to seek “to create a low-level and stable inflation rate that maximizes social benefits.”
The current inflation has been lower than the target inflation during his three-year tenure so far, and the unemployment rate has risen with the decline of the construction industry. Lowe said that it is possible to cut interest rates further in the future.
“If demand growth is not sufficient, the board will further relax monetary policy and provide more support,” he said.
“But as I have discussed on other occasions, other public policies have to keep up.”
Even if interest rates are no longer cut, Lowe guarantees to Australians that they don’t have to worry about rising interest rates for the foreseeable future.
“Whether loose monetary policy is needed, it is reasonable to expect a lower interest rate for a longer period of time,” he said.
“Before the inflation rate returns to the median of the target range, raising interest rates is quite impossible.”
As for why inflation has been below the target range in the case of strong job growth in previous years, Lowe said that the proportion of people who are working or looking for work is unforeseen by the central bank.
“When we made forecasts in mid-2017, our assumption is that the participation rate in the job market will remain stable in the next few years,” he said.
“At the time, this was considered a reasonable prediction: we expected an increase in employment participation, but thought it would be offset by an aging population.”
“Employment growth is stronger than expected, and the participation rate has increased by 1.5%, which is a significant increase for a relatively short period of time.”
“Simply speaking, strong employment demand is met by more job supply.”
This means that the employment rate has remained above 5%, and the underemployment rate has remained stubbornly at historically high levels, while wage growth has been tepid.
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