James Morley

Like the Federal Reserve has done recently, the RBA should focus on managing (i.e., preventing a fall in) inflation expectations by clearly communicating that they intend to offset the effects of undershooting their target range now by allowing inflation to run at the high end of the target range for longer than otherwise in the future. I discuss the rationale behind this forward-guidance strategy in https://johnmenadue.com/james-morley-the-rba-should-stick-to-inflation-t....

This forward-guidance strategy implies that the RBA is likely to need to maintain the policy rate at 25bps (a further cut is less effective than clear forward guidance about future policy and its link to economic conditions) for the next three years and beyond until inflation runs at high enough levels to bring average inflation over a five-year horizon back up to well within the target range. It is possible, albeit with low probability, that inflation will rise quickly enough and to a high enough level that the RBA will be in a position to return the policy rate to a somewhat more neutral level. Quantifying this low probability is difficult (it is more a matter of “uncertainty” than “risk”), but it would be a mistake to assume the probability is exactly zero.

Outcome date: 
Monday 05 October 2020
Current rate: 
12 months: 
6 months: 
3 years: 
Surname: 
Morley

Updated:  23 October 2020/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin