The newly re-elected Liberal National government of Australia has set up a review on the long-term inflation target of 2 to 3 per cent, set by the Reserve bank of Australia. However, any changes made through the review are expected to be minor in nature.
Treasurer Josh Frydenberg is expected to scrutinize the monetary policy agreement which has been set by the independent central bank and the government that is primarily used to guide the action of the bank in terms of interest rates. Lately the calls for the Reserve Bank of Australia to reduce the target has increased, that have been consistently running below 2 percent in recent years.
On the other hand, RBA governor Philip Lowe has staunchly defended the 2 to 3 percent rate, as being in the best interests of the country. According to reports, any changes made through the agreement through the review would be marginal, and would primarily focus on whether the statement meets the need of current circumstances.
Global Banks Struggle to Manage Consistent Low Inflation Rate
The central bank in Australia has already cut interest rates two times since June 2019, bringing it to a record low of 1 percent, which was aimed towards bringing down the country’s unemployment rate, while simultaneously pushing up inflation and wages. Josh Frydenberg made a statement on the review saying: “I will be signing an agreement in due course, but am currently taking advice from Treasury, after which I will have a discussion with the governor.”
The Reserve Bank of Australia is one of the many central banks around the world that has been grappling with the issue of consistently low rates of inflation, and like the others is aiming to add increased stimulus for healthy economic activity.
Further, analysts think that the RBA is unlikely to widen the inflation target, as market assumptions that further cuts in rates are unlikely would increase thereby pushing the value of the Australian dollar up, which would result in undesirable effects such as bearish pressure on import costs, and reduced competitiveness of Australian exports.