Interest rates, the RBA and inflation

[StuartW]

Very interesting article / discussion about the appropriateness of adjusting the cash rate to manage inflation within the 2% to 3% target. Should an inflation target be used? Is 2% to 3% still appropriate in today's environment? See attached.

Interested in your thoughts...

Cheers

Stuart

 

[StuartW]

There's also another article in today's Fin Review on p31.

 

[dave99]

Hi Stuart,

What alternative band would you suggest?

Suppose we set a band of 5-6% and inflation was consistently at that level. Then we have another oil shock or credit crunch. Would you then allow inflation to go to 9% rather than risk a recession?

Where does it stop?

 

[StuartW]

I agree that inflation needs to be contained. However, if there are factors external to Australia which are pushing up inflation here at home, then our domestic monetary policy will not impact inflation. That's an issue.

I don't propose to have the answers... just putting the topic out there.

 

[dave99]

There are definitely factors outside Australia impacting inflation - and there always have been.

The question is whether imported goods are causing the bulk of inflation in Australia. At the moment I think that they are not - that the bulk of inflation is due to high demand in 2007 rather than the oil price increases of the last 6 months, which haven't really had time to filter through to prices yet.

The RBA agrees that the inflation is largely domestic, and responsive to interest rate rises. We'll see in the next 12 months whether they were right.

Many goods and services have a very small transport component (e.g. most services) and shouldn't be heavily affected by oil prices. So I hope that we won't get to a situation where inflation in Australia is largely driven by oil prices. That would be a difficult situation.