The Governor explains. Rory Robertson gave me an almost verbatim carbon copy of this when I asked him the same question a few days earlier...
"Ms O’DWYER —Governor, I am keen to follow up on the CPI discussion and comments that we had earlier. In particular, the Treasurer has given the RBA a consumer price inflation target of between two and three per cent on average over the cycle. As a result of that, it is widely believed that the RBA has a target range of around 2.5 per cent throughout the cycle. Many of the other countries have lower implied CPI targets of less than two per cent—countries such as Canada, Britain, New Zealand and the US and Europe. I am interested in your explanation as to why it is that Australia seems to have a higher inflation target than these other countries.
Mr Stevens —There is quite a lot of history here. As you know, the present Treasurer does endorse the target, and so did the previous Treasurer. Indeed, the bank really began articulating this notion as far back as about 1993. I think it is true that, as you say, a number of other countries have lower targets. Some have higher targets—many emerging or developing countries have quiet figures than we do—but the typical number for those who have a formal target amongst advanced countries is probably a fraction lower. It is only a fraction, but it is nonetheless a little bit lower.
Regarding the history of how we got to this set of numbers, in all honesty—and I was pretty involved in this—we got to two per cent in the early nineties as a result of a big fall in inflation that happened during the recession then. It did not look like we were going any lower. We had eight per cent inflation on average for 20 years. I certainly felt, and I think this was held in the bank generally, that, if we could hold somewhere near that, that was going to be a quantum jump in performance compared to the history. We should not over-promise and state exactly two, because that was reached in the depths of quite a deep recession. We should accept that there would probably be a little bit of upward movement as recovery proceeds, but keep the number under three on average. The other thing is, if you went back and looked at price-stability countries par excellence in the post-war period—Germany and Switzerland—they had a two-point-something average, as I recall. My thinking was, ‘That is pretty good. If we could do that, that would be a very good outcome.’ That is basically where this two-to-three came from. So far, over 18 years, I think the average performance was not quite exactly 2.5 but it is very close, so we have achieved what we wanted to do."
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