The flexibility of the target allowed the avoidance of an unnecessary cost to the real economy of trying to cap the rise in inflation to below 3 per cent, consistent with the dual mandate. In 1996, as demand pressures were easing, the Bank’s forecast was for inflation to decline. The stance of policy was eased, even though inflation was still above 3 per cent.
The flexibility of the target, and its forward-looking focus, allowed the assessment of whether the inflation target was at risk in the medium term sense to determine the appropriate policy response. That episode went a long way to enhancing the credibility of the framework with wage and price setters as well as with financial markets.