SYDNEY: A sudden re-evaluation of the outlook for consumer prices by the Reserve Bank of Australia has fueled debate over whether inflation-focused central banks need to lower their targets to reflect global deflationary pressures that are beyond their control.
The downward force of fuel and commodity prices that has thwarted the European Central Bank’s efforts to spur inflation and forced the Bank of Japan to effectively tear up its two-year inflation deadline has also contributed to Australia’s first bout of quarterly deflation since 2007. That triggered a rate cut by the central bank and a slashing of its inflation forecasts earlier in May that took market participants and economists by surprise.
Analysts sensed a structural shift in the narrative of the RBA. Some economists raced to predict a continued aggressive cycle of cuts, while others wondered whether it was time for the central bank to get a reality check on its inflation target of 2%-3% and either lower it or abandon it. The RBA is likely to indicate that it remains wedded to the target, stressing that there is a high degree of flexibility for policy that goes with it.
