Reserve Bank governor Philip Lowe may have to explain why the institution has failed to hit its inflation target under a plan being considered by Treasurer Josh Frydenberg.
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The Treasurer confirmed on Wednesday he was considering a change in the formal agreement between himself and Dr Lowe that governs the relationship between the bank and the government.
The agreement, signed between then treasurer Scott Morrison and Dr Lowe soon after he became governor, shows both the RBA and government agree that a "medium-term inflation target" is the best way to manage prices.
"They agree that an appropriate goal is to keep consumer price inflation between 2 and 3 per cent, on average, over time," it states.
"The 2-3 per cent medium-term goal provides a clearly identifiable performance benchmark over time."
But the RBA has consistently failed to reach its inflation target over the past six years.
Since 2013, inflation has been between 2 and 3 per cent in two quarters. On the bank's preferred measures of underlying inflation, which excludes one-off price changes, it hasn't been in the target band since the December quarter of 2015.
An option is to follow a system used by the Bank of England where, if inflation is 1 percentage point above or below its 2 per cent target, it must write to the Chancellor of the Exchequer to explain why.
Some within the government believe the Reserve could have hit its target if it had cut official interest rates sooner and lower. Late last year the bank was signalling the next move in rates would be up.
Mr Frydenberg said the 2-3 per cent target had served well but noted it had been a long time since the Reserve had inflation around that level.
"It is not going to be a radical change, but there is a discussion about maybe ways we canstrengthen that agreement, strengthen that target to ensure that we continue to see inflation where the Reserve Bank and the government want it to be," he said.
"It is 1.6 per cent today and the target is 2 per cent to 3 per cent. As you know from recent quarters, we have been a long way short of it."
Dr Lowe was challenged at a recent parliamentary hearing by Labor's Andrew Leigh over the bank's failure to hit its target.
"I wouldn't agree with the proposition that we've failed. We're facing some difficult challenges," he said last month.
Shadow treasurer Jim Chalmers said Mr Frydenberg was taking an extended period of time to finalise his agreement with Dr Lowe, given the election was in May.
- SMH/The Age
