Former prime minister Paul Keating isn’t alone in wanting the Reserve Bank to do much more to ensure economic recovery.
But we think there’s something else the Reserve Bank can do.
Governor Philip Lowe is right to call on governments to spend more, creating “fiscal stimulus”.
But we don’t think that absolves the Reserve Bank of the need to provide more “monetary stimulus”.
Simply put, the Reserve Bank needs to create more inflation. Quite a lot more.
For years now, the bank has chronically undershot its inflation target of 2% to 3% per year. This has to stop.
Consumer price inflation since the Reserve Bank’s 2-3% target
- ^ directly funding government spending (www.smh.com.au)
- ^ ABS Consumer Price Index, Australia (www.abs.gov.au)
- ^ No big bounce: 2020-21 economic survey points to a weak recovery getting weaker, amid declining living standards (theconversation.com)
- ^ so far resisted (www.rba.gov.au)
- ^ Price-level targeting: how inflation-focused central banks can squeeze more from interest rates (theconversation.com)
- ^ United States Federal Reserve (www.abc.net.au)
- ^ Statement on the Conduct of Monetary Policy (www.rba.gov.au)
- ^ interpretation (www.afr.com)
- ^ Vital Signs. Yet another year of steady rates. What's the point of the RBA inflation target? (theconversation.com)
Authors: Chris Edmond, Professor of Economics, University of Melbourne