Has the RBA already lowered its inflation target?

From Scott Haslem at UBS:

Has the RBA already lowered its inflation target to 2% y/y from 2-3% y/y? A literal reading of last week’s post-meeting statement is that the RBA believes keeping interest rates unchanged from here at a record low of 1.75% will be low enough to see “inflation returning to target overtime”. If history is any guide, returning to target has typically meant underlying CPI of 2½% y/y, the target mid-point and usual landing point (more than 80% of the time over the past four years) for the RBA’s 2 year-ahead forecasts (Figure 1). Indeed, post the global crisis, the RBA has only deviated twice below an endpoint of 2½% y/y (and then only to 2¼% y/y).

But last month’s forecast update saw the RBA dramatically lower its underlying inflation endpoint to just 2% y/y. Moreover, their forecasts were constructed assuming a further cash rate cut to 1.5%, i.e., based on market pricing at the time (though we’re led to believe there’s much less precision to just how explicitly such assumptions truly impact the published forecasts). With inflation forecast to be below the target mid-point, even with a further cut implied, analysts have rushed to forecast the cash rate to 1% – three more cuts – being most likely needed to see inflation back to the mid-point of the 2-3% target.