RBA’s Stevens Says No Need to Amend Bank’s Inflation Target

  • Central bank governor says target has ‘adequate flexibility’
  • Target doesn’t demand ‘knee jerk responses,’ Stevens says

The Reserve Bank of Australia’s outgoing Governor Glenn Stevens defended the central bank’s inflation target and said the framework had proved a successful tool in deciding interest rates.

“It’s not at all a very rigid thing that demands knee jerk responses on our part,” Stevens said of the 2 percent to 3 percent target band, in remarks to the Trans-Tasman Business Circle in Sydney on Tuesday. “It’s easiest the best monetary policy framework we’ve ever had.”

Stevens said he was responding to commentary that the inflation target should be changed as disinflation that’s swept much of the developed world arrives in Australia. The RBA cited low, broad-based inflation as the trigger behind reducing the cash rate to a fresh low of 1.75 percent on May 3, its first cut in a year.

The governor said that nobody could control inflation in the “very short-term and you shouldn’t try.” Australia’s annual inflation rate has been below 2 percent since the third quarter of 2014.

“We shouldn’t just give up and throw away a framework that’s actually been very successful,” he said.

Currency Weakens

The Australian dollar fell during Stevens’s comments, which lasted about 45 minutes in an interview and Q&A session. The currency bought 71.97 U.S. cents at 2:29 p.m. compared with 72.22 cents prior to the event. Stevens wasn’t drawn on the Aussie’s direction, other than to say it’s “doing what you’d expect it to do.”

“Today’s comments suggest that the bank will continue to respond to inflation, but will not slavishly cut rates in response to further disappointment on the inflation front,” Australia & New Zealand Banking Group Ltd. analysts said in a research note.

Asked about the property market and the risk that lower interest rates will stoke housing prices, Stevens said regulatory curbs have worked effectively in parts of the market that were showing signs of “exuberance.”

New Zealand

Stevens’s comments on the inflation target echo those of former Reserve Bank of New Zealand Governor Don Brash, who said this week that his nation was too fixated on the range. Brash oversaw the introduction of inflation targeting in 1990 that helped to tame rampant price increases.

Australia’s weak inflation outlook underscores the challenge facing Stevens’s successor, his current deputy Philip Lowe. When Stevens took the helm in the third quarter of 2006, inflation was 4 percent -- and climbed to 5 percent two years later before the global financial crisis pulled it back.

Asked whether he had any advice for his successor, Stevens responded: “Grow a thick skin.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE