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MNI ANALYSIS: Lowering Inflation Target Not An RBA Option Now

MNI (London)
--Lifting Wage Expectations Remains RBA's Main Monetary Policy Strategy
By Sophia Rodrigues
     SYDNEY (MNI) - It is unlikely the Reserve Bank of Australia will consider
lowering its inflation target over the next few years as it would be completely
at odds with the their current policy strategy of lifting wage expectations,
despite some merit in the argument that low inflation outcomes in recent years
have been partly due to structural reasons. 
     Inflation outcomes in Australia have fallen short of the mid-point of the
RBA's 2% to 3% target band for a few years now, and the latest Statement on
Monetary Policy shows the RBA expects this trend to continue until the end of
the forecast period -- December 2020 -- when it expects inflation to be just
2.25%.
     This has led to some renewed interest in the debate that the RBA should
lower the inflation target and aim at 2% as the mid-point, bringing them in line
with other central banks like the Reserve Bank of New Zealand, Bank of Canada
and the Federal Reserve.
     --PATIENT WITH LOW INFLATION
     In a Q&A session following a speech last week, Governor Philip Lowe said
the RBA has no plan to review the inflation target anytime soon. Lowe pointed to
academic debate for raising the inflation target, rather than lowering it, but
mainly talked about the benefits the long period of inflation targeting has
achieved, and the risk that changing it would de-anchor inflation expectations.
     But more than the risk of de-anchoring inflation expectations, any lowering
of the inflation target now would clash with the RBA's strategy to lift wage
expectations. This is because it is not just inflation, but also the RBA growth
forecasts, that are reliant on accelerating in wages growth.
     The RBA has been tolerant of low inflation in recent years and Lowe keeps
talking about continued patience, so in a sense their acceptance of said could
be regarded as a de facto acceptance of a lower target. Further Lowe admitted at
the ECB's Sintra forum in June that the system looks less inflation prone that
it once was due to reasons including technological progress.
     But none of that means the RBA is ready to start a conversation about
officially lowering the inflation target.
     --LIFTING WAGE EXPECTATIONS VERY IMPORTANT 
     Lifting wage expectations is clearly an important strategy and one that is
unique to the RBA. 
     Lowe's main worry has always been that the low wage outcomes in recent
years would lead to falling wage expectations. So one part of his monetary
policy strategy has been lifting wage expectations, with the other supporting
growth via accommodative monetary policy. Lowe hopes that stronger growth would
eventually lead to a shift in labor demand-supply, and on to a gradual lift in
wages. And he knows that for that to happen, wage expectations can't fall too
far.
     Household consumption also remains a key element underpinning the RBA's
growth forecast, and an acceleration in wage growth is important as it boosts
household income and thus spending. 
     In an environment of highly-indebted households, alongside slowing or
declining housing prices, wage growth is needed to do the heavy lifting as far
as consumption goes, as households can no longer rely on rising housing prices
to support consumption.
     It is likely the RBA will pursue their strategy of raising wage
expectations until they see increases that would support their household
consumption forecasts. Any debate about lowering inflation target would,
therefore, be at odds and undo the RBA's efforts in this direction.
--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com
[TOPICS: MMLRB$,M$A$$$,M$L$$$,MX$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com

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