Yesterday Henry predicted that
Interest Rates would rise and suggested that perhaps it was time to lock in a
fixed rate mortgage. Today, we ask if Australia’s inflation target is set too
high compared with the rest of the word and is the RBA (or is it the Treasurer, as
he set the 2%-3% band?) ensuring that Australians face systematically higher
interest rates than those living in countries with lower inflation targets?
Alex Erskine certainly believes so:

The solution – adopt the same band
as the rest of the world, or at least lower the floor from 2% to 1%, as in NZ.
This is a very persuasive argument.

Monday’s AFR carried an OpEd by Ed
Shann arguing from almost first principles that Australia’s inflation target
band is set too high (“Time to rethink inflation band” – Fin subscribers only),
given that the rest of the world has set lower inflation targets.

… our central bank (and central
banks around the world) are now more practised at targeting inflation. Anyway,
in addition, we have come to love the sort of deflation we have now, which is
the result of Chinese ingenuity at keeping manufactured goods prices low even
while our commodities that we export to China rise in
price.

So roll on a downward revision to
the floor of the inflation band, and even possibly a revision down in the
ceiling. The reward would be a
one-for-one reduction in interest rates in the long-term and less need to
depreciate the currency.

Read on at Henry
Thornton.