New Reserve Bank of Australia governor Philip Lowe has defended the central bank's monetary policy framework, telling a parliamentary committee "we are not 'inflation nutters'".
New Reserve Bank of Australia governor Philip Lowe has defended the central bank's monetary policy framework, telling a parliamentary committee "we are not 'inflation nutters'".
Earlier this week, Dr Lowe set a new agreement with Treasurer Scott Morrison for the operations of central bank and kept the inflation target at 2-3 per cent.
Facing the House of Representatives economic committee in Sydney today, he said inflation targeting had served Australia well and helped people make decisions about their savings and investments.
"Low and stable inflation remains an important precondition for strong and sustainable growth in employment and incomes," Dr Lowe said in his opening statement at the hearing.
But he said the Reserve Bank took a flexible approach to inflation targeting and it was not its job to always keep inflation tightly within a narrow range.
"We have not been what some have called 'inflation nutters'. We have had a more balanced perspective, recognising that some degree of variability in inflation from year to year is both inevitable and appropriate," Dr Lowe said.
He said recent figures showing annual growth at 3.3 per cent was a little above estimates, while the 0.5 percentage point drop in the unemployment rate in the past year was also a better outcome than thought a year ago.
Overall, the economy is adjusting reasonably well to the unwinding of the biggest mining investment boom in more than a century.
"This is a significant achievement," Dr Lowe said.
"We are managing this adjustment partly because of the flexibility of the exchange rate and the flexibility of wages and through the support provided by monetary policy," he said.
Dr Lowe said low wage growth and lower commodity prices meant CPI inflation had been quite low and provided scope for two cuts in the cash rate to a record low 1.5 per cent this year.
Inflation is expected to remain low for some time, but then to gradually pick up as labour market conditions strengthen further.
"We expect the economy to continue to be supported by low interest rates and the depreciation of the exchange rate since early 2013," he said.
The drag from the fall in mining investment would also come to an end with three quarters of the decline behind us, he said.
The world economy continues to expand at a rate a little below average with global trade and investment subdued, while inflation is generally low and below most central bank targets.
Dr Lowe noted the US Federal Reserve left its key interest rate unchanged on Wednesday, but its statement said the the case for an increase in the federal funds rate had strengthened.
