Promises need timeframes, otherwise they are just empty words.

If your friend tells you they are doing a diet, you would not think of asking them when it commences, as you’d naturally assume it had begun or would soon.

If your child commits to studying hard for the upcoming maths test, you expect this will commence right away, and not hours before the scheduled test.

If your husband promises to mow the front lawn then, once again, there is an expectation this will happen over the coming weekend.

The point of these anecdotes is to illustrate that without an accepted and sensible time-frame, a promise to do something is not really a promise at all. It’s just words.

If the friend’s planned diet commences in five years, why even bother mentioning it? If the lawn won’t be cut for six months, why promise at all?

This issue has become live in the context of monetary policy in Australia.

We’re currently in a situation where Australia’s quarterly inflation rate stands at 5.4 per cent, more than double the midpoint of the official 2-3 per cent target range.

It is forecast to be above 3 per cent until December 2025 when it is predicted to dip just below the target upper band, 2.9 per cent.

This means the RBA Board has revealed a tolerance to allow the inflation rate to sit above the target for more than four years. We have no official RBA prediction on when inflation will return to the middle of the target (2.5 per cent).

What’s really remarkable about this situation is that getting inflation back in the target band is not constrained by any other policy objective, such as already high unemployment.

Economists estimate that full employment in Australia equates to an unemployment rate of around 4.25-4.5 per cent. The current unemployment rate in Australia is 3.7 per cent and it has been less than 4.25 per cent for two years.

Neither does there appear to be a clear political constraint to a more rapid lowering of inflation. The Senate is investigating supermarket price gouging, and every Albanese Minister in every media interview tells us that cost-of-living crisis is the number one economic challenge. Similarly, the Opposition.

Even for those bearing the brunt of RBA rate increases, the one-third of home borrowers that have a mortgage, things are looking pretty good. Many are enjoying strong wage growth, and house prices are rising. The banks tell us that impaired loans are still at low levels.

If ever there was a time for the RBA Board to act decisively and get a timely return to the inflation target, now would be that time. Is four years really a sensible time-frame?

It could reasonably be argued that the costs of adopting a four-year path is fine so long as consumer and business expectations do not become, as the term goes, ‘unanchored’.

This refers to the idea that it is beneficial to the economy if consumers and businesses believe inflation will remain low, stable, and predictable. This helps people focus on productive things, like doing a good job, rather than destructive things like partaking in ongoing industrial action to protect real wages.

However, evidence is emerging that inflation expectations of consumers is starting to drift higher, and this risk rises the longer it takes to get inflation back to target.

An interesting development is the new agreement between the Federal Treasurer and the RBA Board called the Statement on the Conduct of Monetary Policy.

These agreements have been operational since 1996 when the then Treasurer, Peter Costello, introduced one to promote RBA independence and endorse the inflation targeting strategy.

In the latest version, and for the first time, the Treasurer has set down the government expectation on the time-frame issue. It says:

‘The Reserve Bank Board sets monetary policy such that inflation is expected to return to the midpoint of the target. The appropriate time-frame for this depends on economic circumstances and should, where necessary, balance the price stability and full employment objectives of monetary policy.’

In essence, this is saying that if we don’t have full employment, then take more time and go easy on interest rate rises to hit the target.

With the imprimatur from the Treasurer to push out the time-frame if unemployment rises above full employment, an obvious question arises:

If the RBA Board has an above target inflation tolerance of four years when unemployment is well below the full employment level, what time-frame would be adopted in a scenario of excess unemployment, like we had in the 1980s?

Five, six, seven years? Indefinite?

If unemployment does rise substantially, in part due to corrosive policies like Labor’s re-regulation of the labour market and high electricity and gas costs, my sense is that the inflation target time-frames will be pushed out further and further.

If that happens, the inflationary target risks becoming more a theoretical and historical relic, rather than a sensible discipline guiding sound monetary policy.

---

Nick Hossack is a public policy consultant. He is former policy director at the Australian Bankers’ Association and former adviser to Prime Minister John Howard.

Get 10 issues for just $10

Subscribe to The Spectator Australia today for the next 10 magazine issues, plus full online access, for just $10.

SUBSCRIBE 10 issues for $10 REGISTER 3 articles a month

Already a subscriber? Log in