The Reserve Bank’s flexible inflation targeting approach to monetary policy has tended to look through the positive global supply shock, although persistent low global inflation is now incorporated in the Bank’s future policy track. Monetary policy has also been patient in light of the apparent Phillips curve flattening.
The combined effect of these developments has seen inflation running below the 2% target mid-point for some time. To the extent that the leverage of monetary policy over domestic inflation may have reduced, this suggests a cautious approach when responding to inflation deviations from target and careful attention to our assessment of economic slack.