Evolution of inflation expectations in Australia is now key

The decision by the Reserve Bank of Australia to cut interest rates to 1.75% and revise down its inflation forecasts is still causing waves, but what happens next largely depends on the evolution of inflation expectations. Our analysis suggests that inflation expectations may not fall much further. This is why we aren’t rushing to forecast interest rates falling below 1.5%. The risks are on the downside, though, and we expect that rates will remain very low for a few years.