Blow to savers as rates stay put

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 remains sluggish.

In a fresh blow for those being hit with ever dwindling returns on savings accounts, RBA governor Philip Lowe has also said the nation’s central bank would not be adjusting its inflation target, arguing to do so risked “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 any time soon.

“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 among economists 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.

Expanding the target to 1 per cent to 3 per cent, for example, would take further interest rate cuts off the table as inflation would be within the RBA’s new band.

Dr Lowe said that while it was “understandable” such questions were being asked, it was wrong to suggest the RBA could not succeed in hitting its existing inflation target.

High inflation rates in economies such as Argentina and Turkey also showed technology and globalisation did not, by themselves, lead to low inflation, Dr Lowe said.

“The monetary framework clearly matters too,” he said.