RBA Tracker

What's "good"?

RBA Governor Bullock was asked last night what “good” meant with reference to this statement in the most recent RBA Board Minutes:

“[The Board] would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.”

At the time we noted that such a focus on actual data outcomes appears inconsistent with the forward-looking nature of the Board. Let’s put that aside for now, except to note that inflation data surprises matter for the outlook for at least two reasons: (i) they reset the starting point for the inflation outlook; and (ii) underlying inflation exhibits a fair degree of momentum - i.e. autocorrelation - so ‘surprises’ can matter for the near-term outlook too.

The Governor largely side-stepped the question but noted that it’s not just one data point that the Board is focused on. Bullock emphasised that the Bank/Board focuses on a wide range of data and also its own liaison.

Nothing new there. The evolution of labour market data and key business liaison and survey measures have ALWAYS been important for policy deliberations.

In our view, however, there is nothing quite like a solid surprise on inflation to really sharpen a central banker’s focus. Two relatively recent episodes were the re-starting of RBA policy easing following the downside surprises to Q1 2016 and Q1 2019 trimmed mean inflation.

In that vein, with nowcasts of Q4 underlying inflation pointing to the possibility of an undershoot relative to the RBA’s latest forecasts, how should we think about the RBA Board’s near-term reaction function?