RBA, government reaffirm inflation target

The RBA has joined with the government to restate its commitment to the 2 to 3pc medium-term inflation target.

The RBA is sticking with its inflation target.

The Reserve Bank has joined with the federal government to restate its longstanding commitment to the 2 to 3 per cent medium-term inflation target, while also providing itself a little more wiggle room to ensure “financial stability”.

The affirmation comes on the first day of Philip Lowe’s reign as RBA Governor, after he officially took the hot seat from Glenn Stevens yesterday.

In the formal Statement on the Conduct of Monetary Policy — delivered every three years by the RBA governor and federal treasurer — the two counterparties offered their continued support of the inflation target despite some analysts urging the central bank to be more flexible given the prospect of weak price pressure for the foreseeable future.

“Both the Reserve Bank and the government agree that a flexible medium-term inflation target is the appropriate framework for achieving medium-term price stability,” the statement read.

“They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time.

“The governor expresses his continuing commitment to the inflation objective, consistent with his duties under the Act.

“For its part, the government endorses the inflation objective and emphasises the role that disciplined fiscal policy must play in achieving medium-term price stability.”

The broad statement hardly deviated from the last one provided in October 2013, although there was more colour in the conversation around inflation as the RBA and the government sought to dampen any talk the target could be lowered.

“The previous agreement, made in October 2013, did talk about the ‘goal of medium-term price stability’, but the new agreement makes it more explicit,” Capital Economics’ chief Australian economist Paul Dales said.

“This will disappoint some analysts who had hoped that the RBA would combat the unusually low rate of inflation by lowering the 2-3 per cent inflation target.

“As we said last week, that was always unlikely as by reducing inflation expectations and raising the real interest rate, lowering the target would just exacerbate the current disinflationary pressure.”

Mr Dales said additional commentary around the challenge of juggling the inflation target with its financial stability objectives would likely see the market conclude the statement had lowered the chances of another rate cut.

The key line related to the RBA maintaining a medium-term inflation focus to best achieve its objectives “including financial stability”.

“Those last three words are important as they demonstrate that the bank can allow inflation to deviate from the target range if it is concerned about financial stability,” Mr Dales said.

“The RBA has been referring to the financial stability risks in its monthly policy statement, so again this just makes recent practice more explicit ... but the markets will probably still interpret them as a sign that the RBA is unlikely to cut interest rates further.

“We think low inflation will eventually force its hand.”

By 12.45pm (AEST), the Australian dollar had risen US0.2c to US75.35c.