The Determinants of RBA Target Rate Decisions: A Choice Modelling Approach

Abstract

This article examines the determinants of Reserve Bank of Australia (RBA) target rate decisions in the period following the introduction of inflation targeting (1993–2012). A choice modelling approach reveals asymmetry in RBA policy such that the RBA is more concerned about inflation rising above the target band, and the threshold for cutting rates is greater than that required to hike rates. While there is evidence of the RBA following mandated objectives, the likelihood of rate reductions has increased following the appointment of Glenn Stevens, although his term as Governor has coincided with extraordinary economic conditions.