The intervention of former RBA governors continues.
Recently Bernie Fraser said he is not “in the slightest” bit worried about letting inflation in Australia slip below the bottom of RBA’s 2-3% band.
His comments have now been reiterated by Ian Macfarlane, the man who followed him as governor of the Reserve Bank.
The AFR reports this morning that Macfarlane, who is now a director of the ANZ bank, took dead aim at market traders and forecasters whom he implies don’t understand the RBA’s approach to inflation targeting.
He said the problem at the Reserve Bank “is that financial markets, particularly offshore, assume a mechanical application of what they regard as the standard model”.
That’s a comment that reflects the reality of how the RBA has conducted monetary policy since the inflation targeting approach was first adopted under Fraser’s reign at the bank.
“The RBA has always prided itself on having a more flexible – as opposed to mechanical – inflation targeting model than other countries,” Macfarlane said.
He’s right on the money. The flexibility the RBA has given itself in the management of monetary policy, and its approach to the wild gyrations of the Australian dollar, are in no small part responsible for Australia’s magic run of 25 years without a recession.
But Macfarlane also appears to have a message to those who believe the RBA will have to cut deeply in the future (my emphasis).
The inflation targeting approach says that if inflation forecasts are below target, we should run an easy monetary policy – we already have that. It doesn’t say that each time we receive an inflation statistic showing it is below target, we have to cut interest rates.
You can read the original story at the AFR here.