Do we need to change inflation policy

Monday, 6 May 2013  Media Alerts

​A senior economist at the Australian School of Business has responded to today’s GDP figures and the decision by the Reserve Bank of Australia (RBA) not to cut interest rates by asking if the country could do with more of a stimulus package – and whether Australia could benefit from a looser inflation policy.

Dr Jonathan Reeves, a financial economist at the Australian School of Business, said “sound arguments can be made to justify an inflation rate of 4 per cent. However from 2008 onwards the RBA has instead increased interest rates when needed, to keep the inflation rate averaging within the 2 to 3 per cent band. The question is – why are we so overly concerned with potential inflation, while the rest of the world continues to print money at unprecedented levels? It is almost inevitable that at some stage global inflation will start rising.”

“Private sector debt levels and house prices are at excessive levels and moderate inflation over a number of years is one way for adjustment to occur to more sustainable levels of real - inflation adjusted - debt and house prices.”

The Reserve Bank has kept interest rates on hold at 2.75 per cent, despite indicators of a weakening outlook for Australian economic growth. Today, further indicators of a slower economy came in the shape of GDP figures showing a sharper-than-expected slowdown in economic growth over the year to March, which grew 0.6 per cent in the first quarter of 2013.

Dr Reeves said “cutting rates further is important in helping Australia navigate the turbulence of the global economy. Australian inflation is not high by current international comparisons and does not pose as much of a threat to our economy as record highs for the currency. Given two ‘evils’ – inflation or an appreciating currency – it is clear that our current level of inflation is by far the lesser evil of the two. Officially amending the inflation target to be in the 2-4 per cent range could prompt further easing in the value of the Australian Dollar, down from what are still historically high levels.”

The RBA says over the coming one to two years the Bank expects inflation to be in the 2–3 per cent range.

Dr Reeves forecasts that unemployment may rise above six percent shortly, explaining “the impact of monetary policy on the unemployment rate can often be delayed. For example, the relatively high interest rates and resulting high exchange rate in recent years, is only now showing up in a rising unemployment rate. Due to this delayed reaction, current expansionary monetary policy is unlikely to prevent the unemployment rate from rising over six per cent. If the goal is to keep the unemployment rate from rising too much, I expect more fiscal stimulus will probably be required in the future.”

For further comment please contact Dr Jonathan Reeves on 02 9385 5874 or reeves@unsw.edu.au

Media contacts:
Julian Lorkin:
02 9385 1574

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