In recent news we read:
Australians must urgently confront the danger that the Reserve Bank of Australia is nearing the very limits of its powers and risks stumbling into the same zero-interest rate trap that has neutered European and Japanese central banks, say two high-profile economists.
Saul Eslake, one of the nation’s most experienced economists, and the ANZ Bank’s top analyst, Richard Yetsenga, say the examples of major central banks around the world don’t provide much hope that ever-more intensive monetary policy stimulus can resurrect inflation.
“The evidence is that even aggressive monetary policy action doesn’t seem to be driving up inflation, so far,” Mr Yetsenga told AFR Weekend.
Calls for a national debate on the eve of the Federal election about how the central bank operates come after the Reserve Bank issued the weakest inflation outlook since introducing its 2-3 per cent target range in the early 1990s. It also comes a day after Phillip Lowe was announced as the replacement for RBA Governor Glenn Stevens.
“Aggressive monetary policy action”? Quite the opposite. Australia weathered the international crisis of 2008-09 because, differently from most other central banks, it managed to avoid letting NGDP to fall below trend, quickly reversing the initial fall in spending, as the two charts indicate.
By identifying the stance of monetary policy with the level of its policy rate, it has allowed NGDP growth to fall continuously, and that has taken the level of spending below the long-term trend.
Meanwhile, inflation has fallen somewhat below the 2%-3% target range, something that is not novel. Since the start of the “IT” regime in 1992 Australia´s inflation, both headline and core measures of the CPI, have averaged 2.5%, and that´s certainly a most satisfactory outcome.
The RBA´s goal should be clear. Work to put NGDP back on the level trend it was at!