Nation’s inflation target is still suitable, says Reserve Bank governor

Reserve Bank governor Philip Lowe says interest rates are not rising anytime soon and he will deliver more cuts if economic growth continues to be sluggish.

Savers despair and borrowers rejoice — the head of the Reserve Bank says interest rates are not rising anytime soon and he is ready to deliver more cuts if economic growth continues to be sluggish.

In a fresh blow for those being hit with ever-dwindling returns on savings accounts, RBA governor Philip Lowe also says the nation’s central bank will not adjust its inflation target, arguing to do so risks “normalising low growth”.

The inflation target is a key economic benchmark the RBA bases its interest rate decisions on, meaning the framework that has produced all-time low interest rates will not be changing.

“The evidence does not support the idea that a change to our inflation target would deliver better economic outcomes than achieved by our current flexible inflation target,” Dr Lowe said on Thursday, speaking at a business event.

“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.

“Shifting the goalposts could also entrench a low-inflation mindset.”

The RBA works to boost the nation’s economic wellbeing by ensuring inflation remains within a “goldilocks band” of 2 per cent to 3 per cent on average over time.

This is the level at which the economy is deemed to be running neither too hot nor too cold.

Inflation has undershot the band for the past three years, prompting the RBA to cut the cash rate to a historic low of 1 per cent in a bid to spur economic growth.

There is growing debate among economists about whether developed economies have entered a new phase where low inflation is a permanent feature.

Reserve Bank governor Dr Philip Lowe in Sydney on Thursday. Picture: Adam Yip

Some economists argue they have — as a result of globalisation, new technology and ageing populations — meaning the RBA’s inflation target is keeping interest rates too low, short-changing savers and swelling share and property prices to dangerous levels through cheap credit.

Expanding the target to 1 per cent to 3 per cent, for example, would take further interest rate cuts off the table as inflation would be within the RBA’s new band.

Dr Lowe said that while it was “understandable” such questions were being asked, it was wrong to suggest the RBA could not succeed in hitting its existing inflation target.

While consumer prices rises had stayed low in Japan for a decade, inflation had been around central bank targets in Canada, Norway, Sweden and Britain, he said.

High inflation rates in economies such as Argentina and Turkey also showed technology and globalisation did not, by themselves, lead to low inflation, Dr Lowe said.

“The monetary framework clearly matters too,” he said.

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Given the RBA’s inflation target was appropriate, Dr Lowe said households should “expect an extended period of low interest rates”.

The RBA was also prepared to cut the cash rate further and was comfortable with inflation remaining below its target for “some time”, he said.

“If demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” Dr Lowe said.

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates.

“On current projections, it will be some time before inflation is comfortably back within the target range.”

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