Interest rates going nowhere but down

IN news to make savers despair and borrowers rejoice, the head of the Reserve Bank says interest rates are not rising any time soon and he is ready to deliver more cuts if economic growth continues to be sluggish.

In a fresh blow for those being hit with ever dwindling returns on savings accounts, RBA governor Philip Lowe also said the nation’s central bank would not adjust its inflation target, arguing to do so risks “normalising low growth”.

The inflation target is a key economic benchmark the RBA bases its interest rate decisions on, meaning the framework that has produced all-time low interest rates will not be changing.

“The evidence does not support the idea that a change to our inflation target would deliver better economic outcomes than achieved by our current flexible inflation target,” Dr Lowe said, speaking yesterday at a business event in Sydney.

“Lowering the target might have the short-run advantage of allowing us to say we have achieved our goal, but shifting the goalposts hardly seems a good way to build long-term credibility.

“Shifting the goalposts could also entrench a low inflation mindset.”

The RBA works to boost the nation’s economic wellbeing by ensuring inflation remains within a “goldilocks” band of 2 per cent to 3 per cent on average over time. This is the level at which the economy is deemed to be running neither too hot nor too cold.

Inflation has undershot the band for the past three years, prompting the RBA to cut the cash rate to a historic low of 1 per cent in a bid to spur economic growth.

There is growing debate about whether developed economies have entered a new phase where low inflation is a permanent feature.

Some economists argue they have, as a result of globalisation, new technology and ageing populations, meaning the RBA’s inflation target is keeping interest rates too low, short-changing savers and swelling share and property prices to dangerous levels via cheap credit.