Insights 
VT 
NSW Treasury Corporation’s chief economist, Brian Redican, has urged the Reserve Bank of Australia to abandon its focus on achieving a 2.5% midpoint in its inflation target range. He claims this benchmark creates unrealistic expectations for monetary policy and causes confusion in financial markets.
Redican argues that global influences like oil prices and U.S. trade policy have a more substantial impact on inflation than minor interest rate changes. He also criticises the RBA’s reliance on economic models for decision-making and questions the relevance of the neutral rate.
Statement On The Conduct Of Monetary Policy
His remarks precede a new Statement on the Conduct of Monetary Policy, expected to be signed by Treasurer Jim Chalmers and the RBA board. This statement might cement the 2.5% midpoint target as part of the RBA review’s recommendations.
The Reserve Bank of Australia’s meeting is set for July 7 and 8, where a 25 basis point rate cut is anticipated. The latest monthly CPI data is at 2.1% for May, suggesting further rate cuts might occur if this trend continues in the official quarterly data.
Redican’s comments point to a growing discomfort with rigid inflation targeting, particularly the fixation on a middle figure that might not reflect current realities. What we’re seeing is that the conventional tools central banks use, like minor changes to interest rates, have limits when external shocks—like rising oil prices or tariffs abroad—are steering the course. The implication is that policy may be aiming at a moving target using instruments better suited to a more contained and predictable setting.
The use of the neutral rate as a guidepost has begun to lose traction. Redican sees it as an outdated compass, especially when calibrated by models that often struggle to capture sudden shifts in global demand or supply. When large external pressures are driving domestic outcomes, tinkering with base borrowing costs might do less than expected. For us, the issue is not in the intent of policy, but in whether the usual tools are still fit for purpose.
Inflation Midpoint And Current Realities
All of this feeds into current expectations for the Reserve Bank’s July meeting. With recent inflation readings easing off—May’s figure coming in at 2.1%—there’s mounting support for lowered rates, possibly by a quarter point. If forthcoming quarterly figures align with what we’ve just seen, traders should prepare for a more dovish lean in the near term.
A core idea here is that the inflation midpoint might be too blunt or narrowly defined for today’s economic environment. When central banks hold fast to such benchmarks, they can fall out of sync with the actual data and its drivers. That can rattle pricing models and market expectations. For those of us operating in rates markets, it highlights the need to follow data closely, rather than attaching too much importance to institutional targets that were shaped under very different conditions.
We should also be watching for the language in the upcoming Statement on the Conduct of Monetary Policy. Depending on how tightly it reaffirms the 2.5% figure, it could either give the RBA more room to interpret conditions flexibly, or push it into a box that compels action even when circumstances don’t justify it. Should that midpoint be formalised in writing, model-driven responses may reassert themselves irrespective of what external pressures are doing.
The broader theme here is that the gap between domestic policy levers and international price pressures is widening. It’s not enough to see receding inflation and assume rate policy will follow as expected—it depends on what is driving the numbers down, and how persistent those drivers are. Accordingly, it may be worth revaluing volatile components in CPI baskets to see whether current trends are anchored or merely drifting down temporarily.
Market pricing, of course, will likely start factoring in a sequence of cuts, assuming the data holds. But it’s the details in the commentary—between the official rate decisions—that will matter just as much. Any indication that the board is less model-bound opens the door to a more varied range of outcomes.
As we read between the lines, the work is to gauge not just where the RBA will move rates, but how committed it remains to longer-term inflation goals that might not match present-day reality. Whether or not forward pricing reflects this yet is debatable, but one-way expectations based on rigid benchmarks should be treated with caution.
Pay close attention to the balance of trade data, energy markets, and any adjustments in U.S. monetary stance. These will likely matter more in shaping short-term trajectories than internal estimates of output gaps or policy-neutral positions.
