However, while the higher terms of trade have supported aggregate demand, the dominant effect on CPI inflation has been the lower import price inflation. Our policy approach to this weakness in imported inflation has been to less than fully offset. The weakness was not expected to be so persistent and it has been overlaid with uncertain and cyclical commodity price movements.
Also, the existing easy monetary policy stance and positive terms of trade effects were expected to add to domestic inflation pressures. The persistence of the shock has resulted in CPI inflation running below the 2% target mid-point for a considerable period. Such a policy response to external supply shocks is consistent with our flexible inflation targeting framework.