Inflation targeting, RBA style

The Reserve Bank showed vividly this week how sceptical it is of its own inflation forecasting. If Australia had a monthly CPI, there's a good chance it would have cut rates.

The Reserve Bank's devotion to its inflation target was on full display this week. Indeed, Tuesday's decision to hold rates steady offers clear insights into the way the bank operates. Despite economic growth being 'somewhat below trend' and labour market conditions having 'softened during 2011' by the Reserve Bank's own admission, they are nonetheless waiting for the next inflation print before they possibly cut rates. Rather than trust its forecasts, it seems the Reserve Bank is very focused on actually seeing the trends in the CPI data. This is an important point for understanding its behaviour.



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