With the fight against high inflation over, will the Reserve Bank of Australia fail to learn the lessons of the past and allow inflation to fall below 2 per cent?
The RBA has a target to keep headline inflation between 2-3 per cent. By any reasonable measure it has completely failed on this in the past decade.
The June quarter shows that inflation has been within the band for the past four consecutive quarters. This is the first time we have seen four consecutive quarters in the RBA target band since 2014.
Since the end of 2014, there have been just eight quarters where inflation has been in the target band and half of those are the four most recent. That means just eight of the past 43 quarters have been in the band. How can that be judged as anything but a complete failure?
Most recently, the inflation rate has been higher than 3 per cent. But for most of the past decade, it was outside the band because it was below 2 per cent.
In the 43 quarters since December 2014, inflation has been too high for 12 quarters, but too low for 23 quarters.
You might think that inflation is bad, and so having inflation below 2 per cent is a good thing. But there is a reason that the RBA inflation target has a lower limit.
Low inflation comes with sluggish economic growth and higher unemployment. The 2022 RBA review actually rebuked the Reserve Bank for not doing enough to increase inflation in the years before the pandemic. It said the bank had kept interest rates too high for too long when inflation was below 2 per cent, which resulted in more people being unemployed.
Remember, the RBA is not just supposed to keep inflation within the band, it also has an objective to maintain full employment.
Throughout the inflationary spike following the pandemic the RBA has talked tough on getting inflation back to target. The board statements have frequently noted: “The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”
The fact that inflation spiked after the pandemic and was above the target band was not the fault of the RBA. This spike in inflation was worldwide and was caused by factors far beyond its control.
But actions speak louder than words, and the past 10 years have highlighted that the RBA shows a lot of concern when inflation is above the band and too little concern when it is below the band. This means it has not shown enough attention to the employment side of its mandate.
This history is important because there is now a real risk that the RBA will fall back into bad habits. The most recent quarterly inflation data in June 2025 showed inflation had fallen to just 2.1 per cent, the very bottom of the target band. The monthly inflation for June was just 1.9 per cent. It is important to note that the monthly inflation figures are not a complete read on inflation like the quarterly figures.
Despite this, the RBA seems more concerned about a sudden outbreak of inflation that might push inflation back up above 3 per cent, rather than the risk that unemployment might rise. Has the bank failed to heed the review? Will it allow inflation to fall below 2 per cent and for unemployment to continue to rise?
If the RBA lets inflation fall too low, then people will lose their jobs, and those with mortgages will continue to be squeezed. We can’t go back to the failure of the pre-pandemic period.
Matt Grudnoff is senior economist at the Australia Institute. Read the original article here
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