The Treasurer’s naming of Glenn Stevens as Governor of the Reserve Bank of Australia today has been a horse-racing certainty. Everyone likes a favourite who wins, and especially one who has worked so diligently to earn his position. Financial markets have not blinked.

The immediate issue now is the appointment of his deputy. Presumably this will be another safe pair of hands initially, rather than an adventurous youngster, given Stevens’ relative youth and potential for two terms as Governor.

The next most immediate consideration is tomorrow’s rate rise. Now that Stevens is in place, there is no reason why a move of 50bp cannot be made, if that is what the Board considers is now required. But it is more likely to stick with the 25bp increase that is already priced in.

In the longer term, we may reflect that it is disappointing that the Treasurer has not exercised the opportunity to reduce the inflation target set by the government that the new Governor is to achieve.

The target remains at “2%-3% over the course of the cycle” (or words to that effect). This is disappointing as it ensures that Australian inflation will – over the medium term – be higher than in other comparable countries which are targeting an inflation rate of 2% or less, and so ensures that interest rates will be higher in Australia than they need to be.

This is presumably a case of realpolitik (or is it realeconomic?), in that it would be painful to get inflation into a lower range – say 1%-3% – at this stage by deliberate policy action. But if it happens by accident, for instance if the rest of the world slows down and so reduces our own inflation rate once the oil surge passes through, that might create the opportunity for a lower – and better – inflation target.

Peter Fray

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