An extended period of low interest rates is in the offing and a further cut to the RBA cash rate remains on the cards, Philip Lowe, governor of the Reserve Bank of Australia, made clear yesterday.
In a speech meditating on the RBA board's cautious rethinking on the place of the long-running inflation targeting regime, Lowe confounded the guesswork that a wider reform was on the cards.
The Reserve Bank board “is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 and 3 per cent,” he finally concluded in a speech at a fundraiser for the Anika Foundation.
“On average, over time”, the original qualifier, remains part of the deal.
Targeting is no longer a tidy affair, in Lowe’s reflection on the Australian experience over 23 years. Thus the RBA chief’s main purpose yesterday was to describe a new apparatus under which the target is to be understood.
First, the inflation target for monetary policy in Australia "should be nested within the broader objective of welfare maximisation", Lowe said.
Second, “the inflation target should have a degree of flexibility”.
Lowe explained “this is not to say that the target itself should be flexible; this would diminish its usefulness in providing a medium-term anchor. Rather, some variation in inflation from year to year is acceptable and indeed unavoidable.
“How much variation is too much is difficult to know, but the variation should not be so large that it generates doubt about the commitment of the central bank to achieving the target over time.”
Third, “the inflation target needs to be accompanied by a high level of accountability and transparency,” he said, which may mean more speeches in the diary for himself and deputy Guy Debelle.
Or the whole night to themselves on the ABC’s Q&A or Network Ten’s The Project, better fare than questions from financial markets economists, the sponsors of yesterday’s lunch.
The PR will riff on Lowe’s own summary of his new message.
“If the inflation target is operated flexibly and is nested within the broader objective of welfare maximisation, the central bank has a degree of discretion,” the RBA governor said.
“It is important that when exercising this discretion, the central bank is transparent. Problems can arise if the community doesn't understand the central bank's actions, or if they see it as acting unpredictably or inconsistently with its mandate.
“This means you should expect us to explain what we are doing, why we are doing it and how we are balancing the various trade-offs.”
On Tom Elliott on 3AW on a Friday at 5pm, right before Tom checks in with his dad for the old man’s weekly ramble around the news. (Yes, John, now 78, of Elders IXL fame is still kicking on).
The fourth plank, demoted in the Banking Day retelling from Lowe’s top billing, is that the inflation target should establish “a clear and credible medium-term nominal anchor for the economy.”
Or practical price stability, as Lowe’s forerunner Bernie Fraser called it in 1993.
Lowe conceded that “most people can cope with some variation in the inflation rate from year to year. But dealing with uncertainty about what inflation is likely to average over the medium term is more difficult.
“Inflation targeting plays an important role in reducing that uncertainty by providing a strong nominal anchor.”
Philip Lowe will have disappointed anyone hoping an “underemployment rate target” or similar might have been elevated to equal standing by the RBA board.
Lowe’s own recent speeches have emphasised full employment in a manner that marks him out from so many other RBA governors fighting fires from the days of stagflation and the 1980s boom and bust.
Recent employment growth, Lowe reminded everyone, “has been much stronger than expected and the participation rate has risen by 1½ 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.
“This flexibility of labour supply is a positive development and has meant that strong employment growth has not tested the economy's supply capacity.
“More demand for workers has been met with more labour supply. This has contributed to the subdued wage outcomes over recent times, which in turn has contributed to the low inflation outcomes.”
And how many years of a cash rate at or below 1 per cent will it be that banks have to manage and savers have to deal with before a wages breakout takes us all back towards the good old days? Many.