Inflation targeting works

The Reserve Bank’s focus on inflation is working:

Inflation targeting has delivered price stability without reducing long-term growth, and remains the appropriate focus for monetary policy, Reserve Bank Governor Graeme Wheeler said today. . .

“Price stability has brought many benefits. It enables people to plan and contract with greater certainty for longer periods. It reduces the inflation risk premium in interest rates and the need for speculative inflation hedges, and it reduces the insidious toll that inflation exacts on the more vulnerable and less financially sophisticated,” Mr Wheeler said.

The opposition’s calls for a less rigorous approach to controlling inflation is foolish.

Inflation is theft, it erodes the real value of savings and that hits the poorest hardest.

“In the 20 years before the Act, annual real GDP growth averaged 2.2 percent while annual inflation was volatile around an average of 11.4 percent. Since 1990, real GDP growth and annual inflation have averaged 2.6 and 2.3 percent respectively, and there has been a marked decline in inflation variability.”

Mr Wheeler said the Reserve Bank is a ‘flexible inflation targeter’.

“We seek to anchor inflation expectations close to the price stability objective while retaining discretion to respond to inflation and output shocks in a flexible manner.”

This flexible, medium-term approach to policy was drawn on at the outset of the Global Financial Crisis when the Bank lowered the Official Cash Rate by almost 6 percentage points in 2008-2009, even though headline inflation was initially well above target. This policy stance was able to cushion the impact of the crisis.

In order to do its job effectively, Monetary Policy needs to be supported by prudent fiscal policy and sound structural adjustment policies. Monetary policy can affect the demand for housing and help ease imbalances in the housing market while supply is increased. But it cannot free up more land constrained by zoning regulations, address procedural and pricing issues around planning consents, offset tax policies in the housing sector, or raise productivity in the construction sector. . .

The tax and spend policies proffered by opposition parties before the election would have been inflationary and pushed up interest rates.

Housing prices reflect supply and demand. The best way to address that is to increase the supply where it’s not meeting demand. Local government has a big part of play in doing that by sensible zoning and simple and timely consent processes.

The full speech is here.

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