RBA Believes Current Flexible Inflation Target Band Is Still “Appropriate”

The RBA has said in its submission to the Review into the central bank that it believes that flexible inflation targeting remains “appropriate” and that it regularly looks at other policy frameworks. It also believes that the 2-3% target band should not be changed as that could “damage long-term credibility if it were not done in an appropriate way”.

• The RBA also said that its models suggest 100bp of tightening reduces annual GDP growth by around 0.5-0.75pp over the next 2 years. It has the most impact after 1.5 years. Inflation is estimated to fall by just under 0.25pp over 2 to 3 years. So this year’s 300bp tightening is forecast to reduce inflation by less than 1pp.
• It has found that its unconventional measures were effective in lowering funding costs and supporting credit availability.
• One lesson they noted was that they could have looked closer at the upside risks, which may have led to an earlier pull back of stimulus. “The Board has agreed to strengthen the way it considers the full range of scenarios when making monetary policy decisions, especially when they involve unconventional policy measures."
  - The Australian
• See submission here.