Powered by MOMENTUM MEDIA
investor daily logo

New agreement gives RBA more wiggle room to handle inflation goals

  •  
  •  
5 minute read

The RBA and the government have renewed their agreement on key aspects of the country’s monetary and central banking policy framework.

Treasurer Jim Chalmers confirmed on Friday that the government and the Reserve Bank of Australia (RBA) have agreed on a more flexible dual mandate, relieving the central bank from the obligation of “equal consideration” for both full employment and low inflation in setting monetary policy.

The Treasurer issued a new statement on the conduct of monetary policy on Friday, which unlike the Reserve Bank Act 1959, which is the overarching legislation for the RBA and sets out the broad goals for monetary policy, is an agreement between the government and RBA on more specific targets.

The latest statement responds to some of the non-legislative recommendations from the RBA review, waving off the more controversial idea of the RBA having to juggle equal consideration” for both price stability and full employment.

==
==

This gives the RBA a lot of wiggle room to handle its goals for inflation and employment in a more flexible way.

“The Reserve Bank board and government agree that the goal of economic prosperity and welfare of the Australian people is an overarching objective for monetary policy.

“The Reserve Bank board can best fulfil this mandate by conducting monetary policy in a way that will best contribute to both price stability and full employment,” the statement reads.

The statement also confirms the maintenance of a flexible inflation target of between 2 and 3 per cent, with a focus on the target midpoint.

“The Reserve Bank board sets monetary policy such that inflation is expected to return to the midpoint of the target.

“The appropriate timeframe for this depends on economic circumstances and should, where necessary, balance the price stability and full employment objectives of monetary policy.”

On the employment front, the statement acknowledges that while the government aims for sustained and inclusive full employment, the Reserve Bank board’s role is to prioritise achieving “the current maximum level of employment that is consistent with low and stable inflation", recognising it is unobservable and changes over time.

“The Reserve Bank Board commits to clearly communicating how it is balancing its inflation and full employment objectives,” the statement reads.

“More generally, when inflation is expected to be significantly away from the midpoint of its target of between 2 and 3 per cent or labour market conditions are expected to deviate significantly from those consistent with full employment, the board commits to communicating how long it expects it will be before it again meets each of its objectives and why.”

Moreover, the statement reiterates that the cash rate is the primary monetary policy tool used by the bank, but also leaves it to the board’s judgement around the use of “other monetary policy tools”.

“The Reserve Bank board and government acknowledge that there may be circumstances under which other monetary tools may help to achieve the board’s objectives for monetary policy.

“They agree that the board should use its judgement to determine what these tools are, when they are needed and how they are to be deployed most effectively.”

The statement clarifies that the RBA will “communicate a framework to guide the use of additional monetary tools”, including the benefits, costs, and risks associated with available tools.

“It will draw on a range of inputs, including international experience, independent expert assessments and lessons from the Reserve Bank’s use of additional monetary tools.”

Additionally, the statement notes that the RBA has committed to a review of its policy framework and tools every five years.

Statement applauded

Commenting on the latest statement, Paul Bloxham, HSBC’s chief economist, said the key upshot is that the RBA has been provided with “maximum flexibility in its approach to achieving its monetary policy mandate”.

“In particular, the statement does not specify a timeframe for the RBA’s inflation target, although it specifies that it needs to return inflation to its midpoint,” Mr Bloxham said, and added that this is a shift from the previous wording which stated that the RBA’s objective was to achieve its target “on average, over time”.

Moreover, Mr Bloxham applauded the statement for ensuring that the definition of “full employment” is quite vague.

“Overall, while the fundamentals for Australia’s monetary policy have remained largely unchanged, a lot of specific policy choices will be at the discretion of the RBA board and the statement focuses on the need for the RBA to communicate its strategy clearly,” Mr Bloxham said.

He, however, added that with the RBA’s new monetary policy board, as recommended following the RBA review, still yet to be formed, and other recommendations yet to be implemented, “this adds a further layer of uncertainty for monetary policy heading into 2024”.

Once the new monetary policy board is operational, it is also expected to publish an unattributed record of votes after every board meeting in a bid to increase the bank’s transparency and accountability.

New agreement gives RBA more wiggle room to handle inflation goals

The RBA and the government have renewed their agreement on key aspects of the country’s monetary and central banking policy framework.

ID logo
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic

Maja's career in journalism spans well over a decade across finance, business and politics. Now an experienced editor and reporter across all elements of the financial services sector, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies.

Comments powered by CComment