Xenophon calls for change in Reserve Bank targeting – August 2016
South Australian Senator Nick Xenophon, now leader of the Nick Xenophon Team, has proposed that the Reserve Bank of Australia should abandon inflation targeting to favour a growth target instead.
The RBA has a mandate to keep inflation between 2 per cent and 3 per cent over the course of the business cycle but the majority of its interest rate cuts have followed consumer price index results indicating that inflation was either contained or falling.
Many central banks are now wrestling with how to promote inflation at a time when working populations are falling, technological innovation is keeping a lid on prices, and borrowing costs are at ultra-low levels.
Senator Xenophon said the retirement of Glenn Stevens as RBA Governor and his replacement with Philip Lowe presented an opportunity for a new deal with the government to target economic growth rather than inflation.
“Wages are growing at recessionary levels, profits for small and medium-sized businesses are flat and the budget deficit constrains government spending,” he said.
“Overall, Australia’s ‘nominal’ growth rate – the growth in actual money in our pockets – has fallen from 7 per cent per annum in the decade before the GFC to only 2 per cent today.
“Part of this so-called ‘income recession’ is a hangover from the end of the mining boom.
“A large part of it is also due to the out-of-date inflation target that the Reserve Bank has been tasked with hitting.”
He said the RBA governor typically struck a contract with the Treasurer on the agreed targets for overall economic policy and inflation-targeting was now clearly outdated.
When people saw inflation at low levels and believed it is not going to rise very much, companies were less likely to hand out large pay increases and workers were less likely to seek them.