Personally, I am concerned about this policy change, in that it is possible that the long-term interest rate target level of around 0 percent will gradually lose significance if expectations of a rise in long-term yields heighten in financial markets.
In the last quarter of 2007–08, the 5-year (10-year) WPI inflation expectations at 5 per cent (4.5 per cent) was aligned to the Reserve Bank’s comfort level. The consumer price (CPI-IW) inflation expectation was slightly higher at 5.5 per cent (5.0 per cent). With the persistence of near double- digit inflation in 2010 and 2011, the medium- and long-term inflation expectations have risen.