Inflation has remained consistent with the 2–3 per cent target. For the year to December, it looks as though the Consumer Price Index will have risen by about 2½ per cent, with underlying inflation perhaps a little below that. Our assessment is that inflation will remain consistent with the target over the next one to two years.
When this happens, the typical correlations derived from historical experience tend to break down, liquidity may be more costly to obtain or unavailable, normal risk management strategies may no longer be useful, questions about counterparty solvency escalate, and the result can be a financial crisis. In times of such high uncertainty, it is human nature to act very cautiously.