Outcome: December 2019

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Little evidence of a weakening economy that would warrant rates near current levels. Ongoing low inflation continues to point to a need to recalibrate the inflation target to 1 to 3 percent. Plenty of evidence to suggest that structural issues are the cause of global low inflation, and the RBA will be able to do little to counter that.

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As the RBA approaches the effective lower bound, it is becoming more important to signal exactly how long the policy rate is likely to remain well below its neutral level and to manage inflation expectations in financial markets and for wage/price setters. One way to do this would be to signal that the policy rate is expected to remain close to the effective lower bound until measures of inflation expectations, such as the break-even 10-year inflation rate (which was at 1.3% annual rate in September 2019), return to the high end of the target range of 2-3%. This would likely lead to further depreciation of the exchange rate and lower current and future real interest rates. By doing so, it should help offset the unanticipated effects of the recent undershooting of the target range for inflation in terms on future levels of prices and wages in the Australian economy. The maintenance of such low rates could be expected to last more than 6-8 quarters.

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