Highlights

  • Before the pandemic, professional forecasters gave little weight to inflation when predicting the RBA cash rate.
  • Low inflation did not lead forecasters to expect rate cuts, contrary to a simple inflation-targeting framework.
  • After 2022, once sustained tightening began, perceived responsiveness to inflation rose sharply among forecasters.
  • The 2015-2025 survey data covers three distinct monetary policy periods with different inflation dynamics.

Imagine watching Australian inflation run persistently below the Reserve Bank's 2-3% target band and asking what the RBA would do. Before the pandemic, according to new research, most professional forecasters would have answered: not much, at least not by cutting rates because of low inflation alone. That finding sits at the centre of Research Discussion Paper 2026-06.

The Pre-Pandemic Puzzle

A textbook inflation-targeting central bank responds symmetrically: raising rates when inflation is too high and cutting when it is too low. If forecasters believed the RBA operated that way, sustained low inflation should have led them to expect rate reductions. Research Discussion Paper 2026-06 found otherwise.

Before the pandemic, forecasters in the survey placed little weight on inflation in forming their rate expectations. They did not, as a group, expect cuts in response to low inflation. The paper does not offer a single explanation for this perception and this article does not supply one. The finding stands on its own terms: low inflation was not, in the minds of the professionals surveyed, a strong predictor of lower rates.

What Else Shaped Forecasters' Views

The paper found that RBA communication about labour market conditions and financial stability did shape forecasters' perception of the reaction function, even in periods where inflation communication had less independent effect. This suggests forecasters were incorporating a broader picture than simply watching the price index.

The RBA's current communications reflect a similar breadth. Bullock told senators on 28 October that the Board aims to return inflation to the midpoint of the 2-3% range with some flexibility on timing to balance the full employment objective. That dual focus on prices and employment is consistent with a reaction function that incorporates more than inflation alone.

How the Pandemic Changed Everything

The pandemic and its aftermath disrupted the perceived rulebook sharply. In the uncertain post-COVID period, forecasters updated their view of the RBA's inflation responsiveness only after observing actual decisions, not from communication. Once sustained tightening began after 2022, the update was fast: perceived responsiveness to inflation rose sharply.

That shift is part of what the RBA is working to preserve in 2026. With inflation above target and four rate rises in the year, the Board has been explicit about the risk of inflation becoming embedded and has signalled its willingness to act further if required. The research suggests that the credibility of that commitment rests more on what the Board does than what it says.