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Australasia, Forex

Australia govt reviews RBA inflation target, changes to be minor -paper

SYDNEY, July 25 (Reuters) – Australia’s newly re-elected Liberal National government is reviewing the Reserve Bank of Australia’s (RBA) long-term inflation target of 2%-3%, but any changes are expected to be minor, the Australian Financial Review reported on Thursday.

The AFR said Treasurer Josh Frydenberg was assessing the monetary policy agreement between the government and the independent central bank that guides its actions on interest rates.

There have been calls for the RBA to lower the target given inflation has been running stubbornly below 2% for the last few years.

RBA Governor Philip Lowe, who has long defended the 2%-3% target as in Australia’s best interests, is set to give a speech on the topic later on Thursday.

The AFR reported any changes to the agreement would be “around the margins, if at all,” to ensure the statement was appropriate for current circumstances.

“I will be signing an agreement in due course, but am currently taking advice from Treasury, after which I will have a discussion with the governor,” Frydenberg was quoted as saying.

The central bank has cut interest rates twice since June, taking them to a record low of 1%, aiming to drive down unemployment and push up both wages and inflation.

The RBA is hardly alone in struggling with persistently low inflation as central banks around the world are either already easing or on the way to adding more stimulus.

Analysts doubt the RBA would lower or widen the inflation target, say to 1%-3%, in part because markets would then assume that further rate cuts were less likely and push the Australian dollar higher.

A higher currency would put downward pressure on import prices, and so inflation, while making Australian exports less competitive.

“In his speech today, we think Governor Lowe will highlight that the Reserve Bank’s broad mandate means that it can deliver average inflation of between 2 and 3% in a way that supports sustainable growth in the economy and that best serves the public interest,” said NAB economist Kieran Davies.

Davies also thought Lowe would reiterate calls for more government action on infrastructure spending and structural reform, something it has so far resisted.

A major plank of Prime Minister Scott Morrison’s May election campaign was to return the budget to surplus in 2019-20 and extra spending might endanger that promise. (Reporting by Wayne Cole, editing by G Crosse)

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