One of the most important documents in Australia, and on the Australian economy and markets, is the “Statement on the Conduct of Monetary Policy” which is signed by the treasurer of the day and the RBA governor.
It dates back to 1996 when the then treasurer Peter Costello, and RBA governor designate Ian Macfarlane signed the original Statement on the Conduct of Monetary Policy. The RBA says the purpose of this agreement was to reiterate and clarify “the respective roles and responsibilities of the Reserve Bank and the Australian Government in relation to monetary policy and provided formal Government endorsement of the Reserve Bank’s inflation objective, which had been in place informally for several years”.
It is that inflation objective which has guided the RBA and it is that inflation objective – and the RBA’s targeting of the 2-3% band – which saw the bank drop rates to 1.5% under former governor Stevens, even though GDP growth is above 3% on a year on year basis and Australia is closing in on a world record for growth without a recession.
So it’s an important, if arcane, document.
And the fact that the agreement between federal treasurer Scott Morrison and new RBA governor Lowe had three important changes is notable Ivan Colhoun, the NAB’s chief economist for Markets and Peter Jolly, head of research at the NAB, say.
Colhoun and Jolly say these changes are:
- the inflation target is now defined as “to keep consumer price inflation between 2 and 3 per cent, on average, over time” (previously over the cycle). It does not seem likely that this is a significant change;
- the Governor and Government agree to the importance of low and stable inflation. Previously, the statement mentioned only “low” inflation (not the stability of low inflation). Again, it’s probably not a significant change;
- the statement explicitly includes financial stability in the section related to the setting and objectives of monetary policy. This is arguably the biggest change – but not from the perspective in how the RBA has been behaving, merely in publically recognizing this impacted aspect of monetary policy deliberations.
Colhoun and Jolly say the “the statement again emphasizes the flexibility and medium-term nature of the RBA’s inflation target” and that changes to today’s Statement would not have altered the recent decisions to cut interest rates.
But there is an alternative view. One I hold which suggests to me the bias to ease from the RBA has just been given a strong impetus but the subtle but important changes in this fresh agreement.
The focus on inflation expectations is important in an environment where Australian inflation expectations are slipping. As I wrote last week, that in itself seems to put the RBA back in play.
The focus on financial stability means the RBA won’t be making policy decisions in a vacuum. It suggests that the impacts on housing will now be more formally factored into the decision-making framework.
Likewise, in the current environment, the reference to “stable inflation” suggests the RBA is firmly in play if Australia’s inflation rate dips any further.
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