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Australia Reaffirms RBA Inflation Target, Underlines Flexibility

  • Central bank maintains 2-3% target in new policy agreement
  • Statement highlights flexibility, stability considerations

The Reserve Bank of Australia reaffirmed its commitment to targeting inflation when setting interest rates in Governor Philip Lowe’s first day on the job.

The central bank will maintain its 2 percent to 3 percent goal as part of its Statement on the Conduct of Monetary Policy agreement with the government, Treasurer Scott Morrison said in a statement. While the accord is largely similar to the previous one agreed in 2013, it includes a “clearer expression” of the target’s flexibility and acknowledges that financial stability considerations can be relevant to monetary policy settings, he said.

“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,” read the conduct statement. “This formulation allows for the natural short-run variation in inflation over the economic cycle and the medium-term focus provides the flexibility for the Reserve Bank to set its policy so as best to achieve its broad objectives, including financial stability.”

Inflation targeting remains the centerpiece of the RBA’s monetary policy in a world where boosting consumer prices rather than taming them is the struggle. That’s stirred debates among central bank watchers that the target should be loosened; Lowe himself this month cited Bank for International Settlements research suggesting that financial imbalances could be a better guide than inflation for policy makers.

Headline inflation in Australia hasn’t been above 2 percent since September 2014, while the second quarter’s 1 percent increase was the lowest reading this century. The central bank last month said it expects inflation to pick up next year, rising to between 1.5 percent and 2.5 percent by the second half.

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