Inflation targeting - RIP?

Interbank Cash Rate Futures point to a 65% probability that the RBA Board will cut the Overnight Cash Rate (OCR) by 25 basis points at the August meeting. Real rates have effectively lifted in the first half of CY2016, with the 25 basis point cut to the OCR in May only partially offsetting the 50 basis point decline in underlying inflation. Consequently, Evidente believes that the central bank should deliver another rate cut this week of 25 basis points. With the Governor’s ten year term about to end in September, surely Mr Stevens will not want to leave a legacy of having tolerated a 50 basis point undershoot on the RBA’s inflation target? In this post, Evidente also explores a viable – but as yet untested – alternative to inflation targeting, whose expiry date is rapidly approaching given its inability to address powerful disinflationary forces associated with the global glut in saving. (VIEW LINK)