Opinion: Inflation may fall below target band unless RBA cuts

On a grim Valentine’s Day, the RBA’s obsessive relationship with its inflation target band could leave us all unlucky in love.

The RBA is having a tough relationship with its inflation target band.

OPINION.

It’s a good thing money can’t buy you love, because Valentine’s Day is looking like a miserly affair this year.

A new Finder survey revealed just 24 per cent of Aussies surveyed were planning to celebrate the day in 2025. Of these, many said they would be swapping a dozen roses for a home cooked meal in a bid to save money. The cost of living is biting harder than the love bug.

Funnily enough, one of the outlets that could give people some financial relief, is mired in its own tragic love story.

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Back in 1993, the RBA fell in love with a target band. You see, the central bank was on the rebound from a bad relationship with high inflation. The kind of inflation that saw interest rates on home loans come close to the 20 per cent mark. The kind of inflation that would be etched in Boomer folklore and wheeled out in every argument about which generation had it tougher for the next three decades.

We haven’t hit our target band very often in recent years. Source: ABS, RBA

When consumer price inflation (CPI) figures finally fell between 1988 and 1992, the RBA got a taste of what life could be like with inflation below 3 per cent. And it became infatuated, wanting a serious relationship, a marriage, where the 2 to 3 per cent band would become the norm.

Unfortunately, it turned out to be an off and on relationship. The early days were great and inflation lived happily within its band, but after a while, it grew distant and began to spend more and more time away from home.

By 2015, inflation was ghosting the RBA, returning only on rare occasions for a brief flirtation, before either diving or flying out of reach once again.

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A look at RBA and ABS figures reveals that since December 2015, headline inflation has been within the target band in just six different quarters: March 2017, June 2018, March 2020, September 2021, September 2024 and December 2024. Once that is seasonally adjusted to get the trimmed mean, the number drops to two quarters: September and December 2021.

It goes to show that a target is a target. Something to aim for while acknowledging there will be setbacks along the way. I have a goal to lose 10 kgs, but unfortunately I find myself faced with headwinds such as beer and potato chips. Yep, it’s totally out of my control.

Yet still, the RBA remains committed to the relationship, doing everything it can to get inflation within the band.

There hasn’t been a lot of love for some people this Valentine’s Day. Picture: NCA NewsWire / Martin Ollman

Even if that means half the borrowing population is now in mortgage stress, or that 70,000 people must lose their jobs to get unemployment to a place that justifies even a quarter of a percentage point of relief.

SQM Research director Louis Christopher says a 2 to 3 per cent target band fundamentally makes sense, “but the expectation shouldn’t be that the number is always in that band. There are too many economic factors in the world that we can’t control.”

Ironically, the RBA’s insistence on holding rates to achieve that target band means inflation could soon head below 2 per cent.

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“The last two quarterly headline consumer price inflation markers were 0.2 per cent,” Christopher said. “If we see another 0.2 per cent in March, that’s three straight quarters with a total of 0.6 per cent. There is then a real risk of undershooting the inflation target band.”

And this is why Christopher believes a February rate cut is “a near certainty”.

This Valentine’s Day, RBA, it’s time to take action. Cut rates to keep inflation by your side and bring some love back into the lives of Australian families.

Originally published as Opinion: Inflation may fall below target band unless RBA cuts