It's been steady as she goes over the ditch, too, not just in the sense that the Reserve Bank of Australia also stood pat at its latest decision, and left the Aussie equivalent at 1.5%, but also in the sense that, earlier this week, the Aussies re-committed to their inflation targetting regime, which is broadly similar to ours. They're not identical - the Aussie target is "keep consumer price inflation between 2 and 3 per cent, on average, over time" and ours is "keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint", for example - but they're clearly close cousins. The occasion for the Aussies staying with what they've got, by the way, was the change at the helm of the RBA, with incoming governor Philip Lowe taking over from the outgoing Glenn Stevens.
It would be nice to think that our local politicians will see the Aussies signing on for more of the same and draw the right conclusion - inflation targetting is still the mainstream serviceable model for monetary policy - but of course they won't. As sure as eggs is eggs, come to election time we'll have some of the political parties (and on past form, nearly all of them) promising to 'do' something about our monetary policy regime.
It's not an entirely discreditable exercise: some folks are beginning to wonder if there mightn't be something better. The Economist, for example, ran an editorial piece in its August 24 edition, 'When 2% is not enough: The rich world’s central banks need a new target', canvassing two ideas: raising the current target (typically 2% or so in many developed economies) to 4%, or moving on from inflation targetting to targetting of nominal GDP. The Economist argued that "A 2% inflation target is ill-suited to the rich world today. Doubling it would be an improvement, but targeting nominal GDP would be better still. Time for a new era".
It wasn't the most convincing thing the Economist has ever run. It argued, for example, that "credibly enacted", a 4% inflation target could be a goer, but "credibly enacted" magicks away the whole of today's biggest challenge: if central banks can't hit 2% today, despite throwing unprecedented firepower at it, what makes anyone think they can hit 4% tomorrow? Putting that aside, however, it's nonetheless plausible that there are at least some potential candidates for the Next Big Thing in monetary policy.
But as the magazine also said, "Changing targets is not something policymakers should do lightly; their credibility depends on stability". Exactly right: our current system may not be perfect, and as everyone knows we and other countries have been struggling to get inflation to where it should be, but unless there's a very clear benefit to change, net of the considerable credibility costs involved, we ought to do what the Aussies have just done, and stick with the programme.
Not that I expect this unasked-for advice will make a blind bit of difference to the next sets of election manifestos, but as I said last time I looked at some research on these issues,
...my plea to the pollies is this.Back off. We've got a working system that's done what it said on the label. It takes forever for new monetary systems to get bedded in and for people to get their heads around them: a central bank's credibility takes decades to lock down. We've got there: let's stay there.