So it starts...Market starting to talk about the RBA dropping its inflation target. From ICAP's Adam Carr:
"So they remain concerned about the medium-term outlook but clearly are not prepared to do anything about it – indeed, I would note that lending rates have come down in a sort of de facto rate cut.
How the RBA balances this with the lower growth profile will be interesting. The point about year-ended core CPI remaining consistent with the target is just absurd with the six-month annualised rate at 3.6 per cent – but that’s where we are at.
As I mentioned this morning, the failure of the RBA to hike indicates to me that the Board is now willing to accept higher inflation outcomes. I don’t think they’ve dropped the target per se, but rather moved it or pushed it out. It seems to me that, informally at least, the target is higher. Where that is I don’t know.
Will they act if year-on-year core CPI pushes through 3 per cent? 3.5 per cent? Knowing the new trigger point is not easy. Certainly 3.6 per cent annualised wasn’t high enough, and it’s worth noting the Bank of England’s analytics at this point. They’ve been talking down or looking though inflation for years now, finding one excuse after the next to keep rates low. I think the RBA has taken a big step toward that path today.
Bottom line, the CPI is no longer the key guide post to near-term or perhaps even medium term policy, I suspect. That box has already been well and truly ticked.
My guess is that the industry representatives on the board have no intention of hiking rates and I haven’t changed my view on that front. At the end of the day if back-to-back core CPI prints around 0.9 per cent can’t move the board, then, to be honest, I really don’t know what will."
