MNI BRIEF: Ex RBA Dep Gov Grenville Backs 2% 'Point' Target

Former Reserve Bank of Australia Deputy Governor Stephen Grenville has suggested the central bank replace its 2-3% inflation target with a more specific 2% target, in a submission to the RBA review. He argued that the central bank should return to the original flexible inflation targeting, which he defined as flexible "constrained discretion" with two outstanding attributes – anchoring price expectations and insulating the central bank from political influence.

"This might be the moment to set 2% to replace the 2-3% specification. This would belatedly return to the original notion that the target should be a point rather than a range," he wrote. "This focusses inflation expectations and avoids ‘sharp edges’ separating success from failure in meeting the target. One useful addition would be to acknowledge the asymmetrical capacity of interest rates to influence activity and the need for fiscal policy to be ready for a pro-active role, beyond the automatic stabilisers."

Grenville said that none of the RBA's unconventional policies appeared to have worked well. "Yield targeting should not be attempted again, and forward guidance should be confined to assuring the market that the Bank would meet its inflation target, over time."