(Adds market reaction in 4th paragraph)
By Swati Pandey
SYDNEY, July 25 (Reuters) - Australia’s top central banker said on Thursday it was prepared to provide additional policy stimulus if future demand growth disappointed and that it was “reasonable” to expect an extended period of low interest rates.
The Reserve Bank of Australia (RBA) has reduced interest rates twice since June to a record low 1% to revive growth and inflation. Financial markets are pricing in a real chance of a third cut before Christmas.
“On current projections, it will be some time before inflation is comfortably back within the target range,” RBA Governor Philip Lowe said in a speech in Sydney.
The promise of lower for longer rates sent yields on 10-year government bonds to a record low of 1.237%, compared with around 2.5% at the start of the year. The local dollar eased to a two-week trough of $0.6965.
“The (RBA) Board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 and 3%,” Lowe added.
“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”
Lowe was speaking on “Inflation Targeting and Economic Welfare” amid speculation in local media and academia on whether the RBA should lower its target, given consumer prices have been running stubbornly below 2% for more than three years now.
Earlier in the day, the Australia Financial Review newspaper cited Treasurer Josh Frydenberg as saying the newly re-elected government would review the RBA’s 2-3% inflation target.
Lowe made it clear that the target was still appropriate and has “stood the test of time”.
“We are not inflation nutters. Rather, we are seeking to deliver low and stable inflation in a way that maximises the welfare of our society,” Lowe said.
Lowering the target might have the short-run advantage of allowing the RBA to say they have achieved their goal, changing the target “hardly seems a good way to build long-term credibility,” he added.
“Shifting the goal posts could also entrench a low inflation mindset,” the RBA chief said. “This brings me back to the question: is inflation targeting still appropriate? The short answer is yes.”
Lowe said the RBA was closely monitoring the debate in the academic community and at other central banks.
“In my view, 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,” he noted. (Reporting by Swati Pandey; Editing by Sam Holmes and Richard Borsuk)