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RBA inclined to continue slashing rates
Australia should expect an extended period of low interest rates as the Reserve Bank of Australia tries to deliver on its inflation targets, according to the Reserve Bank governor.
RBA inclined to continue slashing rates
Australia should expect an extended period of low interest rates as the Reserve Bank of Australia tries to deliver on its inflation targets, according to the Reserve Bank governor.
In a speech made at the Anika Foundation Luncheon, governor Philip Lowe refused to rule out further rate reductions if the economy does not reach inflation targets, stating that “shifting the goalpost [on inflation] hardly seems like a good way to build long-term credibility”.
He added that “shifting the goalposts could also entrench a low inflation mindset”, with the bank still aiming for a 2 to 3 per cent increase to inflation.
How others got back on track
The governor cited Canada, Norway, Sweden and the United Kingdom as examples of other central banks focusing on inflation.
Despite mixed results, it appears that countries nearer to full employment capacity are more likely to have inflation close to target, Dr Lowe noted.
Lessons learned from Japan and the euro zone
The governor also considered the fact that Japan and parts of Europe have previously suffered an extended period of very low inflation as evidence for the need to focus on inflation targets, because for these economies, it became harder to get back on track due to a deflationary mindset taking hold.
Markets react
Off the back of the governor’s speech, the Australian dollar fell when compared to the US dollar, despite the United States’ Federal Reserve threatening to cut its own rates next week.
With rates continuing to drop worldwide, Payden & Rygel’s senior vice president, Brad Boyd CFA, has observed that each nation is trying to appear as competitive as it can.
“You have a little bit of a race to the bottom right now, in terms of wanting to look the cheapest compared to the rest of the world,” Mr Boyd said.
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