The phrase "the RBA's 2–3 per cent inflation target" appears in virtually every discussion of Australian monetary policy. Yet most Australians — including many who follow the news closely — have never had it properly explained. This piece fills that gap.
Where the Target Came From
The 2–3 per cent target was introduced in 1993, making Australia one of the first countries in the world to adopt formal inflation targeting. The logic was simple: a predictable, low rate of inflation allows businesses and households to plan with confidence, reduces the distortions caused by unexpected price changes, and gives the central bank a clear and transparent mandate. The target is set as a range — not a point — to acknowledge that inflation cannot be controlled with surgical precision.
Why Not Zero?
Zero inflation sounds appealing but carries serious risks. It provides almost no buffer against deflation — a sustained fall in prices that can be deeply damaging, as Japan's "lost decades" demonstrated. When prices are falling, consumers and businesses delay purchases and investment, waiting for lower prices tomorrow. This delay is self-fulfilling and can trigger a deflationary spiral that is extraordinarily difficult to escape. A modest positive rate of inflation keeps this risk comfortably off the table.
The Cost of Getting It Wrong
When inflation runs persistently above 3 per cent, the RBA is required to raise interest rates to bring it back under control. This is exactly what happened through 2022 and 2023, when the cash rate rose from a record low of 0.10 per cent to 4.35 per cent in one of the fastest tightening cycles in Australian history. The consequences were felt across the economy: higher mortgage repayments, tighter business credit, and a sharp slowdown in consumer spending.
Where Are We Now?
Trimmed mean inflation — the RBA's preferred measure, which excludes the most volatile items — has been tracking steadily lower. The RBA expects it to return to the target band in 2025. The speed of that return will determine how quickly the central bank can ease policy and deliver the rate relief that households and businesses are waiting for.
