RBA not full of inflation nutters, says new governor Philip Lowe

New RBA governor Philip Lowe says the central bank wouldn’t be concerned if it missed its inflation target.

RBA governor Philip Lowe, left, appears before the parliamentary hearing. Picture: AAP.

New Reserve Bank governor Philip Lowe has insisted the central bank is not full of “inflation nutters” as he delivered his first speech since taking over the role vacated by Glenn Stevens on Sunday.

In his opening remarks to the House of Representatives Standing Committee on Economics, Dr Lowe reaffirmed the central bank’s commitment to the medium-term inflation target of 2-3 per cent, but hinted the RBA would not be concerned by a period of undershooting the target.

“It is worth emphasising that ever since the adoption of the current framework, the Reserve Bank has been a proponent of what is known as flexible inflation targeting,” he said.

“We have not seen our job as always keeping inflation tightly in a narrow range. We have not been what some have called ‘inflation nutters’.

“We have had a more balanced perspective, recognising that some degree of variability in inflation from year to year is both inevitable and appropriate.”

Dr Lowe alluded to a tweak in this week’s Statement on the Conduct of Monetary Policy, which stressed the challenge of juggling the inflation target with its financial stability objectives.

The market has taken this to mean rate cuts are less likely, with Dr Lowe doing nothing to dampen that speculation.

“Over the years, financial stability considerations have been a factor in our monetary policy deliberations,” he said.

“Recently, for example, we have considered that a very quick return of inflation to the 2 to 3 per cent range at the cost of a material deterioration in the health of private sector balance sheets was unlikely to be in the public interest.

“The revised drafting recognises that our inflation target is pursued in the context of the bank’s broader objectives, including financial stability.”

Dr Lowe also noted better-than-expected growth outcomes for the local economy as the transition away from a mining-led economy continues apace.

“Overall, the economy is adjusting reasonably well to the unwinding of the biggest mining investment boom in more than a century,” he said.

“This is a significant achievement. We are managing this adjustment partly because of the flexibility of the exchange rate and the flexibility of wages and through the support provided by monetary policy.”

Wages growth has been low by recent standards, crimping inflation, in line with experiences in several major global economies.

However, Dr Lowe said the lacklustre wages expansion had at least kept more people in the workforce than otherwise might have been the case.

While the commentary largely aided the case against any more near-term rate cuts, a suggestion the central bank still sees the cash rate having a significant effect on the economy indicates the RBA is still willing to move again.

The cash rate currently sits at a record low 1.5 per cent after two 25 basis point cuts this year.

“Our judgment is that this easing in monetary policy is supporting jobs and economic activity in Australia, and thus improving the prospects for sustainable growth and inflation outcomes consistent with the medium-term target,” Dr Lowe said.

“Looking forward, we expect the economy to continue to be supported by low interest rates and the depreciation of the exchange rate since early 2013.”

The central bank believes the end of the mining investment boom is now 75 per cent behind us, while the drag on national income from falling commodity prices is seen “coming to an end”.

Clouding the picture on commodities a little is the economic transition underway in China, as the nation’s largest trading partner pushes toward a more consumption-focused economy.

Dr Lowe said the shift would be “difficult”, but government intervention was preventing any significant growth pullback for the time being.

“Overall, the latest available data suggest that there has not been a major interruption to growth, although this is partly because the economy is being supported by fiscal policy, including expenditure on infrastructure,” he said.

“So the Chinese authorities face a difficult trade-off: measures to address industrial overcapacity and high debt levels are necessary over the longer term, but are not helpful in the short term.

“We all have a strong interest in them managing this trade-off smoothly.”

The Australian dollar barely budged through Dr Lowe’s testimony, edging down US0.05c to US76.3c at 1.15pm (AEST) after the local unit surged US0.7c overnight.