Reserve Speaks out on inflation

The Reserve Bank Assistant Governor, Glenn Stevens, has defended the Bank's inflation target after two years of inflation well below the Reserve Banks target range.

Mr Stevens, speaking at the Economic Society of Australia on Tuesday, said that while inflation had been quite low in comparison to the RBA's target, there should not be “an obsessive focus on particular numerical targets”. He also stated that the Reserve Bank would not be dumping inflation targeting. The Reserve Bank's current target is 2-3 per cent per annum, while inflation is currently at 1.6 per cent.

Mr Stevens compared the performance of those countries that had targeted inflation to those non-inflation targeting countries, finding that those countries that targeted inflation had achieved a reduction far greater than those countries who didn't have a targeting mechanism.

While Mr Stevens said that there was no need for the Reserve to become inflexible, and obsessed with numbers, he also said that the Reserve would not consider letting inflation to rise above the current target range. Some analysts have predicted that the Reserve's unwillingness to alter its inflation target means that it will be forced to reduce the cash rate by approximately 25 points.