We think the policy implication is the RBA needs to see clear evidence core inflation is trending sustainably higher before it even considers raising interest rates.
A premature tightening of monetary policy may result in even lower inflation outcomes that will have negative feedback implications for wages, among other things.
The intent of the model is not to determine what the RBA cash rate should be but rather to consider what seems to drive changes and whether or not the influence of the various drivers has changed over time.
Still, it can be adapted to determine a point estimate for the cash rate. Based on ANZ’s forecasts for inflation and unemployment, the model suggests a rise in the cash rate at the end of 2018.