RDP 9503: Monetary Policy Goals for Inflation in Australia 5. Conclusion

This paper has outlined the price objective for monetary policy in Australia, which we suggest can best be characterised as seeking to achieve a broad central tendency for inflation of between 2 and 3 per cent over the long run. This “two-point something” objective should result in an inflation rate that is unlikely to affect seriously resource allocation and long-term growth in the economy.

The degree of variability which is to be expected around this mean has not been spelled out explicitly in Australia. In our view, based on forecasting experience and the empirical work in part 4 of the paper, short-run volatility in inflation might well be substantial, without those deviations meaning that long-term inflation performance was necessarily going off track. If this assessment is correct, it would be quite difficult to spell out a hard-edged target band which was sufficiently narrow to have some credibility as a serious objective, but yet wide enough to take account of the genuine uncertainties in the forecasting and policy-making process. It would be better to stick with an indicated central number, with the commitment that policy will always be directed towards maintaining expected inflation, and hence long-run actual inflation, at that level.

It could be that this assessment turns out to be too cautious on both counts. If the experience of other countries, with somewhat more stringent inflation targets in many instances, continues to be a relatively successful one in the 1990s, these views would be subject to revision. We would then need to consider whether a lower mean and/or a tighter short-term variance would be in order.