James Morley

Headline inflation is low primarily because of a dramatic fall in energy prices in late 2014. Some of this has leaked into underlying inflation, with nontradables inflation running lower this year than it has been for a decade, currently around 2.5% vs. 4% of so over the past 12 years. But the large decline in volatile energy prices should have only a one-time effect on year-on-year inflation that will dissipate in 2016. Also, the lower Australian dollar should offset some of these disinflationary pressures by raising tradables inflation. The bottom line is that inflation expectations remain well anchored, with the 10-year break-even inflation rate at 2.2% being well within the RBA’s 2-3% target range, albeit a bit below the middle of the band. A cash rate of 2.0% is low enough given a 6.2% unemployment rate and current inflation expectations. If the neutral rate is lower than previously believed due to secular stagnation and related forces, the RBA should plan less of an increase over the medium term. But there hasn’t been enough new information over the past month to justify cutting the cash rate further on the basis of a lower neutral rate. Meanwhile, the RBA should always avoid setting the cash rate to offset interest rate movements by the banks. The central bank dictates the course of monetary policy, not the banks.

Outcome date: 
Monday 02 November 2015
Current rate: 
12 months: 
6 months: 
Surname: 
Morley

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