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RBA, govt renew inflation target vows

AAP logoAAP 19/09/2016 Garry Shilson-Josling, Economist

The new Reserve Bank of Australia governor and the federal government have renewed their vows on inflation, emphasising the flexibility of the longstanding two to three per cent target.

Treasurer Scott Morrison and new RBA head Philip Lowe confirmed the aim for inflation of two to three per cent "on average, over time" in the joint Statement on the Conduct of Monetary Policy, issued on Monday at the start of Dr Lowe's term.

The latest agreement expanded on the reasoning behind the flexibility built into the target from its inception in 1993.

"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," it said.

The shift in emphasis was likely prompted by debate over the effectiveness of inflation targets with Australia, like many other developed economies, experiencing a inflation rate persistently below its target band.

But the additional emphasis on flexibility does not signal a change in policy - the RBA has always implemented the policy with discretion while still managing to achieve its objective.

The average for inflation over the 23 years of targeting has been 2.4 per cent, very close to the mid-point of the target range, allowing for the impact of the GST in 2000.

At the same time, the annual inflation rate has been outside the band slightly more often that inside it.

In his final major speech as governor, Glenn Stevens last month defended the inflation targeting regime, putting it at the top of his list of reasons why the monetary policy framework as "functioned very well".

The latest agreement is the seventh in a series of similar agreements routinely signed on the appointment of a new treasurer or RBA governor.

The first, signed in 1996 by incoming RBA governor Ian Macfarlane and Treasurer Peter Costello, cemented the policy which the central bank had implemented under Bernie Fraser three years earlier.

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