The overnight rate would be reduced, boosting aggregate demand, narrowing the excess supply gap and lifting inflation. It is important to note that the Bank takes a symmetric approach to the pursuit of its monetary policy objective, and is as concerned about undershooting the 2 per cent target as overshooting it.
Keeping actual output at or near potential is the only way inflation can be maintained at a low, stable and predictable level. Establishing an explicit inflation target and consistently achieving it helps to build credibility, anchor the inflation expectations of businesses and households, and make monetary policy more effective.