So here Phil Lowe is really hammering home Paul Bloxham et al's RDP on the RBA's approach to inflation-targeting. Key point: it is a through-the-cycle, thick-band objective that gives the RBA the flexibility to respond to financial stability considerations (eg, asset prices) if and when required.
The RBA is slightly too hubristic in its analysis of overseas financial stability problems, in my opinion. When you listen to APRA, the Treasury and the RBA, it is always the far-sighted domestic regulatory regime--and fiscal and monetary policy settings--that are the central explanations for Australia's outperformance. This is a very long bow to draw, and little different to a fund manager confusing excess returns with alpha.
Amongst policymakers, luck does not receive nearly enough recognition, as I have argued many times before. Similarly, you would think from Lowe's remarks that the RBA has always had this flexible inflation-targeting approach that makes explicit room for using rates to address financial stability innovations.
That is simply not true--it is something that has evolved over time and only been properly bedded down post GFC. As recently as 2008 and 2009 Guy Debelle and David Gruen were questioning the merits of using rates to mitigate asset price and credit problems, while the Governor was fond of referring to the whole subject as a live "debate".
In my judgement, the RBA has only ever used monetary policy against rising asset prices once, and that was after the crisis when it normalised the cash rate more quickly than it otherwise would have due to concerns about the speed of house price gains.
On the flip-side, I think the magnitude of the rate cuts since the start of November 2011 have been influenced by the soft housing market conditions, and the RBA's desire to pre-emptively take out insurance against deteriorating bank collateral. Anyway, here is Phil Lowe:
I mean, in Australia, right since the implementation of our inflating targeting-regime nearly 20 years ago, we’ve had a flexible approach. We’ve never been of the view that our job is to keep inflation always and everywhere between 2 and 3 per cent. What’s important is that, over time, we anchor the community’s expectation about what type of ongoing rate of inflation you could expect in this country, and I think we’ve done that relatively effectively. The problem in the other countries is I think they took their eye off financial stability considerations. They thought that by just keeping inflation low and stable would generate financial stability. And we’ve certainly never had that view. You might recall in the early 2000s we talked a lot about the dangers of excesses in the housing market, and we did that within the context of an inflation-targeting 5 framework. So I think the framework is the right one, because it tells the community, over long periods of time, “You’re going to have this average rate of inflation.
