A growing number of economists have called on the Reserve Bank of Australia (RBA) to lower its inflation target from 2% to 3%, in order to bring it into line with global peers:
Yarra Capital Management macro and strategy chief Tom Toohey said: “The RBA remains in the unenviable position of not being able to meet its legislated inflation target for a record 45 straight months.”
He says evidence suggests the current range is too high, and says Britain, the US, and Canada all have a 2 per cent target…
David Bassanese of BetaShares said: “I think the RBA is fighting the last war in trying to get inflation up and is risking financial excess with persistent low interest rates.
Mr Bassanese says the RBA should adopt an inflation target of between 1 and 3 per cent to provide it greater flexibility in monetary policy…
Warren Hogan nominated 1 to 3 per cent, Nomura’s Andrew Ticehurst “around” 2 per cent, and Capital Economics’s Marcel Thieliant 2 per cent.
Any lowering of the inflation target should be accompanied by changes to the RBA’s mandate to explicitly target underemployment (rather than employment), given underemployment is the number one driver of wage growth and ergo inflation.
The RBA also needs to better integrate the cash rate with macroprudential policy in order to prevent rate cuts from blowing asset (housing) bubbles.