What an inflation targeting central bank would say

The RBA just left rates unchanged and they said:

Inflation is gradually moderating, given the earlier decline in energy and commodity prices, and the effects of weaker demand on prices and labour costs. Given the current prospects for demand and output, this moderation should continue over the year ahead. The higher exchange rate over recent months will assist this moderation, at the margin.

So the higher exchange rate is helping them moderate inflation.

Now our Reserve Bank keeps saying that they are worried that the exchange rate will hurt growth.  For this to fit inside our monetary policy story they must be concerned that, if they don’t cut the interest rate, inflation will fall below the target band.  So why don’t they just say that?

  • Inflation is gradually moderating there is signs from US and UK markets , and Asia markets where also showing some moderated levels in trading and of course this moderation will continue for some years and will bring up economy in to a great position.. in coming years.

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  • @Finsofts

    But inflation is endogenous to the behaviour of the central bank – it is still their focus. If inflation is not an issue (if it is not going to be too low or too high) then the central bank has acted sufficiently to stabilise economic activity – there is no need to focus on output independently.

  • Presumably because they’re not purely inflation-targeting. There’s room in the PTA for a growth story, too.

  • @fibby

    Given that there is a direct short-term trade-off between growth and inflation targeting inflation is the same as stabilising short-term growth – this of course presumes that the only stabilisation role for monetary policy is the face of “demand side” shocks.

    The only growth story that matters is short-term growth (as the nominal shock associated with printing money doesn’t influence long-run activity), and this is implicitly targeted when sticking to an inflation target.