RBA’s Hand May be Forced

Australia has joined the rest of the world as a slow growth and low inflation country, threatening to push a reluctant Reserve Bank into further rate reductions. It may not be at tomorrow’s board meeting — the bank still holds hope the buoyancy of the southeast Australian states will carry through to a sustained lift in investment.

However, the bank will be forced to lower its forecast for inflation in next Friday’s statement of monetary policy and, as an inflation-targeting central bank, it will be under pressure to respond. The bank’s August review predicted that underlying measures of inflation would average 2.5 per cent in 2015 and beyond. Over the last six months, the average has only been an annualised rate of 1.7 per cent.

Inflation has been outside the Reserve Bank’s 2-3 per cent target band at about a quarter of the monthly board meetings ever since it started formally targeting inflation 20 years ago. The board does not jump every time the boundaries are breached. However, the weakness of inflation over the past six months is pushing real interest rates higher which, if allowed to continue, could undermine the hoped for lift in investment.

The Australian