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Why the monetary policy statement won’t change

Opinion Piece

Date : 05 November 2019

Author: The Hon Josh Frydenberg MP

Publication: The Australian Financial Review

Campaigning for the US presidency, Ronald Reagan said nearly 40 years ago that inflation was ‘‘as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”.

Wind the clock forward to today and the chairman of the US Federal Reserve, Jerome Powell, says low inflation, not high, is ‘‘one of the major challenges of our time”.

How things change.

Unless one lives in Argentina, where the inflation rate has hit 50 per cent, inflation is no longer the economic bogyman it once was. In fact, in three-quarters of the world’s advanced economies, inflation is under 2 per cent, and in one-third of these economies it’s below 1 per cent.

Reserve Bank governor Philip Lowe has pointed to a combination of factors that have driven this new dynamic.

They include credible monetary policy frameworks that targeted inflation; spare capacity in the global economy including in more flexible labour markets; and the forces of globalisation and technology, which have enhanced competition and dramatically driven down the costs of production.

Australia is a case in point.

The last time we saw double-digit inflation was in 1983.

Since then, both the 30- year and 20-year inflation average has been 2.6 per cent, and the 10-year average 2.1 per cent.

This low and stable inflation environment has brought stability and certainty to financial markets and given households and firms the confidence to consume and invest.

Underpinning the Australian experience has been the Statement on the Conduct of Monetary Policy, which was initiated in 1996 by the then new treasurer, Peter Costello.

The statement records the common understanding of the government and the governor of the Reserve Bank on the key aspects of Australia’s monetary policy framework.

It sets out the objectives of monetary policy, including price stability, full employment and the economic prosperity and welfare of the Australian people. Although the statement has been modified six times since 1996, with changes typically coinciding with either a change of government or the appointment of a new RBA governor, the triple mandate has remained. So too the inflation target, which is set at between 2 and 3 per cent ‘‘on average, over time”.

This flexible, medium-term target has served Australia well, helping to underpin our record 28 consecutive years of economic growth.

While recent years have seen inflation below the band, I have concluded after careful consideration, as well as consultation between Treasury and the RBA, that the existing statement is consistent with the government’s and the RBA’s shared understanding of the monetary policy framework.

Not changing the statement provides continuity and consistency at this time of global economic uncertainty.

Domestic and global markets can be reassured that Australia remains a stable and predictable place to invest and do business, with a proven and effective monetary policy framework.

Australia is not alone in experiencing an extended period of low inflation, low unemployment and low interest rates. Indeed over the medium term, inflation is expected to return to the band consistent with the statement. Australia has an economic record it can be proud of and a stable monetary policy framework which has helped to underpin that.

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