Jim Chalmers’ new RBA rules risk higher rates

The Reserve Bank board will now have to explicitly target inflation at the middle of its 2-3 per cent target range, according to a new agreement with Jim Chalmers that economists warn could mean interest rates are held high for longer.

A new set of ground rules, known as the Statement on the Conduct of Monetary Policy, sets out how the Reserve Bank will achieve low inflation with full ­employment. Picture: AFP Photo/William West

The Reserve Bank board will now have to explicitly target inflation at the middle of its 2-3 per cent target range, according to a new agreement with Jim Chalmers that economists warn could mean interest rates are held high for longer.

The updated goal is included in a new set of ground rules, known as the Statement on the Conduct of Monetary Policy, which sets out how the Reserve Bank will achieve low inflation with full ­employment.

The new agreement between the Treasurer and central bank board comes after the Albanese government on Thursday failed to pass legislative reforms required to fulfil key recommendations of the RBA review – including the creation of a separate interest-rate setting board.

The RBA will continue to pursue a “flexible inflation target” of 2-3 per cent “in a way that will best contribute to both price stability and full employment”, the statement says.

Treasurer Jim Chalmers has agreed a new set of ground rules with the RBA board on how the central bank will conduct monetary policy. Picture: NCA NewsWire/Martin Ollman

But for the first time, the central bank will set monetary policy to reach “the midpoint of the target”, while maintaining flexibility in achieving that goal.

“The appropriate time frame for this depends on economic circumstances and should, where necessary, balance the price stability and full employment objectives of monetary policy,” it says.

Goldman Sachs chief economist Andrew Boak said: “The increased emphasis on the 2.5 per cent midpoint of the inflation target does pose some hawkish risks to policy settings at the margin, given the RBA is currently forecasting inflation of 2.9 per cent by the end of its forecast horizon.

“However, the change is not large enough to shift our baseline view that the RBA will remain on hold at 4.35 per cent,” Mr Boak said.

IFM Investors chief economist Alex Joiner said that making the 2.5 per cent goal more explicit meant “it remains difficult to see any easing of policy until late next year”.

Former governor Philip Lowe recently warned that central banks, including the RBA, risked losing credibility as inflation fighters should inflation stay above target into 2026.

But Challenger chief economist Jonathan Kearns, a former senior RBA official, said the reference to targeting the midpoint of the inflation target was consistent with what the central bank had ­always done.

“With a forecast ending at close to 3 per cent rather than 2.5 per cent, the new statement suggests the bank would need to be arguing or explaining more clearly why inflation is not forecast to get back to 2.5 per cent within their forecast period,” he said.

“The new statement still does still give some latitude. If you are getting back to 3 per cent, then that is within the target,” he said.

With the goal of increasing contestability in rates decisions at the board level, the new statement says votes cast by board members will be published on a non-attributable basis after each meeting, and members will also be required to give one speech or participate in a public discussion once a year.

Dr Chalmers said it was “surprising and disappointing” that the Coalition had not agreed to pass the Reserve Bank reforms through parliament, accusing Opposition Treasury spokesman Angus Taylor of playing politics.

But Mr Taylor said the changes always needed to go through the committee process, and that he had reservations about who would be appointed to the new monetary policy board, and how.

“I’m deeply concerned he (Dr Chalmers) is using the Reserve Bank review as an excuse to stack the RBA board with people better suited to winning a Labor preselection than fighting inflation,” he said.

The parliamentary economics committee has been set a tentative reporting date of April 19.