Headline inflation, currently at 1.7%, should be expected to remain below the 2-3% target range in the near term given the dramatic recent decline in oil prices. This provides considerable scope for the RBA to delay any increases in the policy rate until at least the second half of the year.

The continued collapse of iron ore prices and the decline in oil prices has prompted some speculation that the RBA will lower rather than raise rates in the near term, especially after the Bank of Canada recently lowered its policy rate in response to the decline in oil prices. It is possible that the RBA will do so.

However, it should be noted that lower oil prices are more of a net positive for the Australian economy than for Canada. And the lower Australian dollar has meant that there will be a broader compensation for the end of the mining boom than just strong growth in interest-sensitive sectors (e.g., construction). In particular, non-mining exports (e.g., higher education and tourism) can be expected to perform well. A robust recovery in the United States also provides some offset for the weaker-than-normal (but still fast) growth in China.

Overall, then, I would recommend the RBA maintain, but not lower, its already low policy rate and monitor how effectively the lower dollar stimulates non-mining exports. Any change in policy direction should be signaled by public communications (i.e., moving away from a reference to “a period of stability in interest rates” in policy statements) rather than trying to surprise markets, as was recently done by the Swiss National Bank in terms of their unconventional monetary policies.