If there’s one thing that Reserve Bank of Australia board member John Edwards likes to do, it’s to create a stir on a sleepy Friday afternoon in Asia.
In an interview with the Wall Street Journal, Edwards expressed a lack of urgency to bring Australia’s core inflation rate — currently running at an annual pace of 1.55% — back into the RBA’s 2-3% target band, fitting with the minutes of the bank’s May monetary policy meeting which indicated that board members had to be “persuaded” to cut interest rates at to a record low level of 1.75%.
“It is certainly right to say that, at this point it is below target,” Edwards told the Journal. “But then it has never been the view that the target had to be achieved each and every quarter, or for that matter each and every couple of quarters, or year for that matter”
“The target exists, and I think it will be desirable to return over time to the midpoint of the target, but I don’t think it can be done urgently, “ he said, adding that he didn’t know of any solution to help lift inflation in the near-term, acknowledging that slow wage growth was one major influence keeping inflationary pressures low.
Certainly not a view one would expect from a central banker pondering whether to deliver back-to-back rate cuts in an attempt to bring inflation back to within target.
Keeping on the inflation theme, Edwards also poured cold water on the notion expressed by some private sector economists that the bank should consider lowering its inflation target, suggesting that the current target has served the country well.
“It would be wildly premature to actually change the target on the basis of what we know now,” Edwards told the Journal. “It would be a calamity to adjust the target downwards and then discover inflation is on the way back up again.”
Rather than the continued focus on returning inflation to target, Edwards suggested that the anchoring of inflation expectations was more important, acknowledging that it would be critical to the outlook for interest rates.
“(The key question is) are inflation expectations anchored around where they had been, and so far I think they probably still are,” he said.
Though only one member of the RBA board, Edwards’ view does not fit with the view presented by some analysts who are forecasting that interest rates will be cut to 1%, or lower, in order to help counteract disinflationary pressures that have intensified in recent quarters.
While few can fault the track record of the RBA, it’s been second to none for decades, if there’s one criticism that could be levelled at the bank it would be that it’s been overly conservative in recent years, being prompted to ease policy rather than premeditating periods of weakness.
Though a slow and steady hand with interest rates is a necessity to ensure households and businesses have confidence to make investment decisions, sometimes reacting too slowly can have even greater negative implications.
It could be argued that this conservative approach cost the bank the opportunity to address building disinflationary pressures in late 2015.
In the end they it didn’t act until prompted, again following the release of the quarterly CPI release in April.
Over the same period wage inflation fell to a record low and the Australian dollar strengthened, two factors that will almost certainly add to disinflationary pressures in the quarters ahead.
Now many believe the board will wait until its August policy meeting before easing policy further, once again based on the belief that it will want to see the next set of inflation figures.
Given heightened uncertainty surrounding the economic outlook, at a time when inflationary pressures are close to non-existent, it’s not surprising that some analysts believe that rates are going significantly lower.
If you think that’s still unlikely, just remember how many were predicting rates would eventually fall to 1.75% at the start of 2015.
You can read more from the Journal here.
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