Why the Reserve Bank’s elusive inflation target means it must hold rates

Borrowers may need to brace for rate hikes despite lower inflation. Picture: John Appleyard

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ANALYSIS

The RBA board members are dead set kidding themselves if they are going to try and convince us that a rate rise is still on the cards for August.

Headline inflation came down from 4 per cent to 3.8 when the ABS released its latest consumer price index last week.

The previous month had also seen a fall from 4.2 per cent. And the month before that had come down from 4.6 per cent. It seems that’s a trend.

Then there was the trimmed mean inflation, something the RBA “prefers” to use when making its decisions (usually when preparing us for a rate rise).

It’s kind of like the Bureau of Meteorology telling us what the actual temperature is, but then that it “feels like” a different temperature.

MORE: Shock as big banks flip rate predictions

So, the trimmed mean was steady at 3.6 per cent (but it feels like 3.8!), which was the first time it hadn’t risen for months. Surely that’s cause to celebrate. We’re winning the war on inflation once again. It’s a slow grind. It may drag on longer than hoped for, but we’re getting there.

inflation is 3.6 per cent, but it feels like 3.8 per cent. Picture: John Appleyard

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There’s now no reason to hike in August, is there?

The RBA can go back to doing the thing it likes to do best … “take a wait-and-see approach”.

Oh, that’s right, it only does that when inflation numbers point to a rate cut.

We don’t want to be too hasty to cut, otherwise those silly families might take the hundred or so bucks they save on their mortgages for the month and put it into something frivolous and fancy free like groceries or medical bills.

When will they ever learn to stop the wasteful spending?

It’s about this time though, when the RBA likes to remind us that inflation “remains outside the target band of 2 to 3 per cent”.

MORE:Shock data today forces RBA U-turn

See, it’s still too high and Ms Bullock may be forced to bring out the cane and punish us naughty children further to bring us into line.

The thing is, that target band is pretty elusive.

My personal target band is to live in the mythical land of Narnia and become that world’s number one golfer.

That’s also proved elusive.

A look at RBA and ABS figures reveals that over the past 10 years, the “preferred” trimmed mean inflation has been within the target band in just two quarters: September and December 2021.

“Aslan, should I hit a full five iron from here, or just swing easy with a four?”

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MORE:Shock as 22 banks cut rates ahead of RBA call

In a whole decade, the RBA has achieved its target only six weeks more often than I have been dominating Narnia’s fairways.

Let’s not talk about the target band as if it’s the natural state of affairs. Targets are things you’d like to achieve, not what you do every day.

Every time you throw a dart, you don’t expect to hit a bullseye. Every time you start a job, you don’t become CEO. It’s something you work towards. And right now, the RBA has inflation working towards its target band. It doesn’t need another knee jerk reaction at this point. Inflation is on track. Let it be.