James Morley

The RBA has recently signalled that the policy rate is expected to remain close to the effective lower bound for a considerable period of time. It would be helpful to provide more explicit guidance about exactly how long by explaining what conditions would lead to a more neutral position. An example would be to formally link the period of low rates to as long as it takes to bring measures of inflation expectations, such as the break-even 10-year inflation rate (which was at 1.5% annual rate at the end of 2019), back to the high end of the target range of 2-3%. This should lead to further depreciation of the exchange rate and even 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 urgency of a strong signal about keeping rates low has increased in recent weeks given the particularly likely negative impacts of a weaker global economy due to the Covid-19 crisis on Australian exports (e.g., iron ore, higher education, tourism). The maintenance of such low rates could be expected to last at least 6-8 quarters.

Outcome date: 
Monday 02 March 2020
Current rate: 
12 months: 
6 months: 

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