Today the RBA board announces its decision on interest rates.

What the board should do: Cut. The inflation rate is well within the RBA’s target band. Every indicator we have points to further falls in inflation in the coming months. The recent budget showed that Treasury believes that inflation will stay in the target band for the next few years.

Interest rates are currently restrictive, that is they’re designed to slow the economy down. The RBA needs to take its foot off the break.

Remember that shifting interest rates has large lags. That means that changes in interest rates takes a long time to work its way through the economy. The RBA needs to set interest rates for what they think the economy is going to be doing in the months and years ahead, not what the ABS says inflation was several months ago.

What the board will do: No change in rates. The RBA believes that there is a risk that the low unemployment rate might suddenly set off a rapid increase in wages which will then flow through to inflation. They keep believing this despite all the evidence that has shown the opposite.

We get the next quarterly measure of inflation from the ABS at the end of April. It will most likely show all the measures of inflation will fall again. After this data release the board will hopefully accept that inflation has been controlled, and they will cut at their next meeting in May.