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Public interest an inflation factor: RBA

AAP logoAAP 17/10/2016 Garry Shilson-Josling, Economist

The Reserve Bank's new governor, Philip Lowe, remains committed the central bank's inflation targeting regime, saying it provides the anchor for inflation expectations needed to support growth in jobs and incomes.

At the same time, against the background of persistently low inflation, he has emphasised the flexibility allowed by the current arrangements.

"Most people can cope without too much difficulty with a bit of variation in inflation from year to year but it is the medium-term uncertainty that is really damaging to planning," he said in a speech in Sydney on Tuesday.

"I hope that it is well understood that our framework allows for temporary deviations of inflation from the medium-term target."

Dr Lowe said Australia has not drifted into a world of permanently low price growth, and expects the inflation rate to again edge up to its target range over the next couple of years.

He pointed out that since the June 1993, shortly after the target was announced, the consumer price index (CPI) inflation rate had been above the target 23 per cent of the time and below it 24 per cent of the time.

"What is important is that we deliver an average rate of inflation consistent with the medium-term target," he said.

The headline inflation rate is currently at just 1.0 per cent.

It was expected to rise over the next couple of years but would still be close to the lower edge of the target band by end of that time, thanks to a combination of excess capacity in the economy, including high unemployment, lower commodity prices and increased competitive pressures.

"But this does not mean that we have drifted into a world of permanently lower inflation in Australia," Dr Lowe said.

The flexible target allowed the RBA some latitude in deciding how much deviation from the target was acceptable.

"The general starting point is to ask: what is in the public interest?" Dr Lowe said.

One key public interest issue is financial system stability; the other is the unemployment rate which, Dr Lowe said, is still half a percentage point above a level RBA economists estimate as "full employment".

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