Reserve Bank’s inflation target to be kept intact, says Treasurer Frydenberg

Josh Frydenberg’s move will ease pressure on the RBA to cut rates, as the central bank prepares to leave rates on hold.

Australia remains a stable and predictable place to do business, Treasurer Josh Frydenberg has said, in a message to markets. Picture: AAP

Treasurer Josh Frydenberg says after months of “careful consideration” he will not change the government’s official agreement with the Reserve Bank, confirming it will be left untroubled to pursue its 2-3 per cent inflation target.

There had been speculation the Treasurer might apply further pressure on RBA Governor Philip Lowe to get consumer price growth back more quickly back within the band after nearly four years of below-target inflation.

“Following careful consideration and consultation between Treasury and the RBA I have concluded that the existing statement is consistent with the government’s and the RBA’s shared understanding of our monetary policy framework,” the Treasurer said in a statement.

“Not changing the statement provides continuity and consistency at this time of global economic uncertainty.”

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Dr Lowe has vigorously argued that the bank’s flexible inflation targeting regime is effective and that changing the target risked the RBA’s credibility. Annual inflation is running at 1.7 per cent and the RBA expects inflation will move back with the target range by 2021.

“Not changing the statement provides continuity and consistency at this time of global economic uncertainty,” Mr Frydenberg said. “Domestic and global markets can be reassured that Australia remains a stable and predictable place to invest and do business with a proven and effective monetary policy framework.

“As I have said on a number of occasions, the current inflation targeting approach has served Australia well, helping underpin our record 28 consecutive years of economic growth.”

The decision to keep intact the agreement ends an extended period of uncertainty around whether the government might seek to change the way the central bank pursues its objectives of price stability, full employment and the broader economic prosperity of Australians.

Mr Frydenberg had previously flagged he might consider making changes to the Statement on the Conduct of Monetary Policy, which has been up for renewal since the government’s re-election in May and is usually left unchanged following changes in governments and governors.

Mr Frydenberg had appeared concerned around the RBA’s inability to reach its 2-3 per cent inflation target and floated the idea of requiring a Bank of England-style “please explain” letter should inflation consistently fall below target.

In the event, the Treasurer said the agreement would remain as is.

“I recognise that Australia is not alone in experiencing an extended period of low inflation, low unemployment and low interest rates,” Mr Frydenberg said in the statement.

“Over the medium term, inflation is expected to return to the band.”

The Reserve Bank is widely expected to keep the official cash rate unchanged at a record-low 0.75 per cent at its monthly board meeting later on Tuesday, although economists expect at least one more cut in coming months.