Ex-RBA’S Edwards: RBA may well begin to tighten even if inflation is below the target

Former Reserve Bank of Australia (RBA) board member John Edwards, published a piece on ‘Global growth: Choppy forecasts, but smooth sailing’ for the Lowy Institute.

Key Quotes:

“Markets in Australia and in other advanced economies are perhaps looking at inflation, and rightly reckoning that it might be quite a while before wages and consumer prices growth picks up.

Maybe so, but if output growth is satisfactory the RBA may well begin to tighten - even if inflation is below the target.

One reason is that very low interest rates at a time of firm economic expansion invite trouble.

As Ellis said in a speech two weeks ago, we may see productivity picking up in the advanced economies. In that case we may have higher output growth without an acceleration of inflation.

She added that if 'inflation stays low despite reasonable growth in a range of economies, policymakers will face a challenge'. This because policy 'still needs to remain appropriately expansionary while avoiding a further build-up of leverage and financial risk.”