Inflation-Plus Targeting at the Reserve Bank of Australia

Inflation-Plus Targeting at the Reserve Bank of Australia -...

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The Australian Economic Review, vol. 37, no. 4, pp. 391–401 2004 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd Abstract This article first outlines the dynamics of what appear to be increasingly prevalent cycles of asset price inflation in liberalised financial systems, as well as the difficulties entailed in successful monetary policy responses. The ar- ticle then analyses the Reserve Bank of Austra- lia’s policy responses to recent rises in credit growth and asset price inflation in the property sector. The Bank’s responses are character- ised in terms of an inflation- plus targeting framework which has subtly redefined the Bank’s approach to inflation targeting to in- clude vaguely defined factors such as medium- term ‘risks’, as well as extending the time frame of such risk assessment. The article ex- plains why, for a variety of reasons, the Bank has been reticent to fully declare its hand. 1. Introduction After much uncertainty and several failed at- tempts in the 1970s and 1980s, the Reserve Bank of Australia (hereafter, the Bank) finally achieved a stable and effective monetary policy regime in the early 1990s (Bell 2004). This centres around a relatively flexible inflation targeting approach whereby the cash rate is set in forward-looking attempts to keep underlying consumer price index (CPI) inflation broadly within a target band of between 2 and 3 per cent over the medium term. The approach has worked well, achieving its primary aims of a low and stable inflation rate and in supporting the conditions for sustainable growth. Since the regime’s inception a decade ago the underlying rate of inflation has averaged 2.4 per cent. The Bank is clearly happy with the results. In 2001 the then Deputy Governor, Stephen Grenville, argued that the Bank had ‘reached some kind of stable resting point … there is no obvious or compelling logic which would move us to a subsequent stage of history’ (2001, p. 41). This sanguine view did not last long. A more recent review by the Deputy Governor, Glenn Stevens, reaches an upbeat assessment of the inflation targeting framework, but then moves on to discuss what to do about the looming challenge for monetary authorities—asset price inflation (Stevens 2003b). This article looks at this challenge, broadly and in the Australian context. It briefly outlines the origins of asset price inflation in a libera- lised financial context and argues that there is no straightforward monetary policy response and that any conceivable response is fraught Inflation- Plus Targeting at the Reserve Bank of Australia Stephen Bell School of Political Science and International Studies The University of Queensland
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392 The Australian Economic Review December 2004 2004 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research with difficulties if not dangers. The Bank’s re- cent concerns about credit growth and asset
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Inflation-Plus Targeting at the Reserve Bank of Australia -...

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