Australia Central Bank Gov Stevens Backs Current Inflation Target

SYDNEY—Australia’s inflation targeting regime has sufficient flexibility to retain its integrity through the current period of ultra-weak price pressures in the economy, Reserve Bank of Australia Gov. Glenn Stevens said Wednesday.

In his final speech as governor before retiring in September after a decade at the helm of the central bank, Mr. Stevens pushed back on suggestions that the RBA’s 2%-3% inflation target was no longer valid, given deflationary pressures locally and in the global economy.

“Frameworks that have a degree of flexibility, that can bend with the circumstances but retain their essential integrity, like an aircraft wing in turbulence, stand a reasonable chance of coming through,” he said.

“I think the inflation target as we have operated it has the requisite degree of flexibility,” he added.

“If it were the case that undershooting the target for a period while achieving reasonable growth was the least bad option available, the inflation targeting framework has the requisite degree of flexibility to allow such a course,” he added.

The RBA last week forecast inflation will remain below the target band to the end of its forecast horizon in December 2018.

Some economists have suggested the target needs to be lowered as there are growing risks associated with lowering interest rates too far to seek a high inflation outcome. Among those risks are the threat of a surge in already elevated house prices.

Mr. Stevens said the RBA’s board has discussed those risks, but it wasn’t the job of policy makers never to take risks.

“I can assure you that the board has been very conscious of that possibility and, accordingly, has proceeded very carefully,” he said. “Our job isn’t to avoid all risk; it is to balance the various risks.”

Over recent years, measures have been taken to tighten the mortgage lending criteria of Australia’s major banks to take steam out of the housing market.

So far, that has worked well and the RBA was able to cut interest rates last week to a record low of 1.50% from 1.75%, saying risks associated with house prices have diminished.

Mr. Stevens again called for economic reforms to lift the economy’s potential growth rate.

“We can’t just assume that monetary policy can simply dial up the growth we need. We need some realism here,” he said.

Mr. Stevens said a return to normalcy in the world economy and conventional policies “still looks like being a very, very slow process.”

Write to James Glynn at james.glynn[a]