How the RBA scores on its inflation goal? Somewhere between 3 & 10 out of 10. Overall 8 out of 10

Key points:

• • Since the RBA gained ‘independence’ in pursuing its 2% to 3% target range, annual inflation has only been in the target range just 32% of quarters, and just 36% of calendar years. It has missed its target TWO THIRDS of the time – so the RBA scores just 3 out of 10 for short-term inflation outcomes.
  • But it was never intended to be a short-term target. Overall inflation over the period has averaged 2.6% pa which is in the MIDDLE of its target range – so the RBA scores 10 out of 10 for long-term inflation targeting.
  • Measured by decade, inflation has been WITHIN its target range EACH decade. Inflation averaged 2.3% pa in the 1990s, 2.8% pa in the 2000s, and 2.1% pa in the 2010s. In the 2020s inflation has averaged 3.8% pa so far, but the decade is not over yet. But inflation over the past 10 years to December 2025 averaged 3%, which is just within target.
  • So, through a host of major global and local crises over the past 30+ years, and despite some policy mis-steps along the way, the RBA has actually ACHIEVED its inflation target rather successfully. Overall 8 out of 10.
  • However, despite the RBA being largely successful in achieving its inflation goal, I have two further questions: (1) Why the RBA has the highest/loosest monetary policy target in the developed world?
  • And (2) Why the RBA and all other central banks target positive inflation at all? – Inflation means constantly rising prices - government mandated theft, and the most regressive tax imaginable.

Today’s chart shows the inflation and policy cash rate picture in Australia from 1993. The dots in the upper section represent annual (rolling four-quarter) CPI inflation each quarter (as quarterly has been the main reporting interval for inflation in Australia).

Red dots for inflation above the 3%; black dots for inflation below 2%; and green dots for inflation within target 2% to 3% range.

Inflation has ranged widely from a high of 7.8% in December 2022 (Covid stimulus boom) to several quarters of negative inflation during the 1997 Asian currency crisis, 1998 Russian debt crisis, as well as 2020 Covid lockdown recession. 

The green 2-3% target inflation range through the middle of the spray of inflation dots scattered by a host of global and local macro shocks illustrates how tough it has been to hit a narrow target range.

The lower section of the chart shows the RBA’s policy cash rate over the period.

One adjustment - for GST introduction

Just one mechanical note. The 10% Goods and Services Tax was introduced from 1 July 2000 caused a one-off +3.9% jump in the general price index in the September quarter 2000. It also affected the rolling four-quarter annual inflation rates in the subsequent three quarters. We can see these four quarterly red dots in 2000-1 on the chart.

A step change in the general price index due to a one-off tax change is not ‘inflation’, so I adjust for this in measuring average inflation rates.

The difference is important, but relatively minor. Over the whole period, this adjustment for GST introduction reduces the overall average inflation rate since 1993 from a headline 2.7% per year to 2.6% per year. Both are near the middle of the middle of the RBA’s stated 2-3% inflation target range.

Brief history of RBA independence and inflation targeting

The Reserve Bank of Australia was established in 1960 (It essentially split out the central banking functions from the government-owned Commonwealth Bank which had been set up in 1911 under the Andrew Fisher Labor government with the intended aim of taking over and eliminating all existing commercial banks, to become one giant, universal, monopoly government-owned peoples’ bank). 

The newly formed RBA had three legislated goals set out in section 10(2) of the original Reserve Bank Act 1959:

1. 1. “the stability of the currency of Australia;
   2. the maintenance of full employment in Australia; and
   3. the economic prosperity and welfare of the people of Australia.”

These goals remain to this day. Although the Reserve Bank Act has been amended several times since 1959, the three original paramount goals are preserved in sections 9B(1)(a)(i), 9B(1)(a)(ii), and 8AA(1) of the current (2025) legislation.  

Looking at each of these RBA goals -

Goal 1: ‘Stability of the currency’

This currency stability goal is essentially the RBA’s inflation goal, which is the subject of this report. I outline below how the inflation target evolved for the RBA, and how its ability to ‘independently’ pursue this goal evolved. More on these later.

Goal 2: ‘Full employment’

The idea of a twin goal of inflation and unemployment was based on the Keynesian notion, prevalent from the mid-1930s to the early 1970s, that there was a policy trade-off between inflation and unemployment. This broke down in the ‘stagflation’ of the 1970s when both inflation and unemployment ran at high levels simultaneously, and it became clear to all (except Kaleckian-Marxists) that a new policy framework was needed.

‘Full employment’ does not mean zero unemployment. Full employment allows for a small level of unemployment in the economy, so that tight labour markets do not fuel excess wage claims and inflation. There is a level of unemployment below which it becomes inflationary. This optimal level of unemployment is known as ‘NAIRU’ (non-accelerating inflation rate of unemployment).

One major problem is that optimal ‘NAIRU’ unemployment is not a constant number. In Australia, NAIRU (ie lowest non-inflationary unemployment rate) was around 2% in the 1960s, then rose to around 7% in the mid-1970s, but came back down to around 6% by the late 1990s. 

When current RBA governor Michelle Bullock commenced her term in 2023, she estimated full employment NAIRU as an unemployment rate of around 4.5% - ie inflation below 4.5% was likely to cause inflationary wage pressures.

Since RBA ‘independence’ in the early-mid-1990s (which I cover below), the unemployment rate has averaged 6.0%, which is about 1% above the estimated average optimal NAIRU rate over the period.

We cannot blame the RBA for that as there has been a general consensus since the mid-1970s that the ‘Phillips Curve’ trade-off between inflation and unemployment does not work, so the RBA cannot be held accountable for higher than desired unemployment that may or may not have resulted from the RBA’s inflation targeting and inflation outcomes.

(For a summary of the history of NAIRU in Australia see Gruen, Pagan, Thompson, 1999, ‘The Phillips Curve in Australia’, RBA).

I cover unemployment and inflation in Australia in more detail here –

• Australia's 'Misery Index': Inflation + Unemployment (16 Feb 2024)

Goal 3: ‘Economic prosperity and welfare’

This is a catch-all, over-arching provision intended to guide the RBA in its conduct of monetary policy. It goes beyond the specific inflation and full employment goals, and extends to other policy areas including financial stability, payments systems, and also originally included the prudential regulation of financial institutions (this was shifted from the RBA to APRA in 1998).

There are frequent debates in central banking circles about whether the overall ‘prosperity and welfare’ goal should extend to things like financial market bubbles (perhaps), and to housing (probably should, given the large impact of housing affordability and housing debt on overall economic activity in Australia). (Just my personal views there.)

Inflation targeting and RBA ‘independence’ in Australia

During the first three decades of its operation, the RBA was not free to formulate and execute monetary policy (or exchange rate policy or bank policy, etc) in its own right. It was essentially an adviser to government, and implementer of monetary policies set by the Treasurer and/or Treasury.

The problem was that in these three decades from 1960 to 1990, CPI inflation in Australia averaged a rather high 6.9% per year (including averaging 10.1% in the 1970s, and 8.3% in the 1980s).

The failure of governments to control inflation in the 1970s (not just in Australia but around the world) resulted in governments finally admitting defeat, letting go the reins, and allowing their central banks to manage monetary policy, away from the grubby hands of governments. Australia was a decade late on this, as we see below.

As economist David Riccardo (architect of the ‘Ricardian theory of free trade’, and the notion of ‘comparative advantage’ of nations) had warned in the 1820s, governments should not be safely entrusted with the power of issuing paper money as they would most certainly abuse it. (‘Plan for the Establishment of a National Bank’, published posthumously in 1824.)

‘Who’s on first?’

New Zealand is generally credited as being the first country to formalise inflation targeting. In February 1990 the Reserve Bank of NZ was set a very specific single goal of targeting zero to 2% inflation, unlike the RBA’s much broader three-part goal. The RBNZ achieved its goal by the end of 1991, a year ahead of schedule, but unemployment shot up to 11% in a painful recession.

In the US, the Fed wrested monetary policy independence back from Treasury in 1951 after a decade of government mandated 'financial repression' to keep rates artificially low in order to reduce government debt financing costs and to inflate away the debt. (Sound familiar?)

The Fed pursued its independence with initial success for the first fifteen years, but the Fed committed increasingly frequent and costly policy blunders as inflation gathered pace from the mid-1960s into the 1970s. 

Finally, after the debilitating stagflation of the 1970s, the Humphrey-Hawkins Act (1978 Full Employment and Balanced Growth Act) required the Fed to conduct monetary policy to promote the goals of ‘maximum employment, stable prices, and moderate long-term interest rates’.

The key turning point in fighting US inflation was President Jimmy Carter’s appointment of Paul Volcker as Fed Chairman in 1979. Volcker quickly hiked interest rates up to 20%, and inflation was successfully brought down to 3% by 1983, but at a cost of a deep double-dip recession in 1980-2 when unemployment soared to 10.8%.

The Volcker rate hike recessions cost Carter a second Presidential term in the 1980 elections (which he lost to Ronald Reagan), and it also nearly cost Reagan his second Presidential term in the 1984 elections.

Although the Fed acted decisively and independently from Treasury since Volcker in 1979, it had no formal inflation target. There appeared to be an internal target of 2% inflation from around 1996, but it was not actually announced as an official target until 2012. . (‘Statement on Longer-Run Goals and Monetary Policy Strategy’ - 24 January 2012)

Australia a decade late in tackling inflation

Australia was a decade behind the US (and NZ and UK) in beating inflation. Interest rates here were also hiked to 15% in 1980 and 20% in 1982, and unemployment jumped to 10.4% in our local 1982-3 recession. But inflation was allowed to remain high for another decade. Why?

As the RBA was still playing second fiddle as back-room adviser to governments and executor of Treasury policy, the Fraser-Howard Coalition government did not do enough to attack inflation in the late 1970s to the March 1983 election, and then the Hawke-Keating Labor government also did not do enough from 1983, focusing instead using the ‘Accord’ wages/incomes policy, and Keating’s obsession with the current account deficit.

The last thing Keating wanted was RBA independence. He often boasted that he controlled the RBA – for example saying that the RBA was ‘in my pocket’ (16 February 1989), and ‘They do what I say!’' (7 December 1990). Silly, but true. (Since then, Keating has claimed credit for RBA independence, inflation targeting, and everything else from sliced bread to the sun rising in the east!) 

As a result, inflation remained high in Australia – averaging 8.3% through the 1980s (compared to 5.1% in the US). Inflation in Australia was only tamed a decade later than the US, UK and NZ, finally in Keating’s ‘recession we had to have’ in 1990-1.

Only in 1993, after the deep 1990-1 recession and the 1992 Westpac/ANZ bank bad debt crisis, did Hawke-Keating shift the focus from their wages/incomes Accord policy toward monetary policy as the primary tool to control inflation. Finally, in the 1995 ‘Accord Mark VIII’ inflation was specifically made subordinate to and subject to the RBA’s 2-3% inflation target. Too little, too late.

Evolution of RBA policy

The transition of effective control over monetary policy took place in several steps in first half of the 1990s, much of it from inside the RBA while Hawke-Keating were absorbed with the Accord and the current account. Here are some of the main steps in the RBA evolution:

• • • 2-3% inflation target was first mentioned in a RBA report for the June 1991 RBA board meeting.
    • August 1992 - Bernie Fraser proposed 2-3% range as a desirable target but not yet a formal policy.
    • 4 August 1993 Bernie Fraser articulated a 2-3% target range for ‘underlying’ inflation, averaged over a ‘medium term’ – ie over an economic cycle, but not yet a commitment to action.
    • 30 March 1994 – Bernie Fraser first committed to a 2-3% target.
    • 17 Aug 1994 – RBA’s first rate hike under the new 2-3% target – it was pre-emptive! (emphasising the forward-looking nature, not a backward-looking ‘data dependent’ view.)
    • 18 Nov 1994 – joint Treasury-RBA announcement by Treasurer Ralph Willis.
    • 23 November 1994 – Bernie Fraser’s address outlining Central Bank Independence
    • 14 Aug 1996 Statement on the Conduct of Monetary Policy – by new Treasurer Peter Costello and RBA Governor designate Ian Macfarlane, confirming the 2-3% inflation target range, and independence of the RBA (independence within, not from, government). It was initiated by Treasury under Ted Evans in the outgoing Labor government, but announced during under the incoming Howard-Costello Coalition regime.

In the early days, the inflation ‘target range’ involved a number of nuances:

1. 1. 1. The target Implied an average rate over time, not a strict rule to try to maintain inflation in the range at all times.
      2. It was ‘around’ 2-3% - not a strict target.
      3. ‘Underlying’ inflation, not headline inflation which often included very volatile items.
      4. It was vaguely defined - no specific definition or metric (eg no single static measure of ‘underlying’ inflation) – the aim was to use judgement rather than slavish adherence to a specific definition.
      5. The target was over an ‘economic cycle’ – ie a medium-term average.
      6. It was forward looking – ie pre-emptive (like Greenspan in 1994), not back-ward-looking ‘data dependent’ as it was to become in later decades.
      7. RBA ‘independence’ meant independence within, not from, government. The government still retains ‘reserve powers’ to over-ride RBA decisions, but they have never been used.
      8. The inflation target was no more or less important than the RBA’s other two legislated goals – ‘full employment’ and ‘economic prosperity and welfare’.

For more on the evolution of inflation targeting and Reserve Bank independence in Australia see - Selwyn Cornish (2019) ‘The Evolution of Inflation Targeting in Australia’, ANU

Given the progressive and evolutionary nature of the shift to inflation targeting and independence in Australia, there is no agreement of the specific start date. For the purpose of today’s report I use 1993 as the start. However if you use 1994 or 1995 or 1996, it does not change the outcomes (not even by 0.1%), nor does it change the conclusions.

Recent events

These nuances surrounding the inflation target range have evolved and been refined over time.

However, it appears that Labor’s RBA board restructure in 2025 has been interpreted such that the 2% to 3% target range has now narrowed toward more of a central goal of 2.5% inflation rate rather than the range. If so, it would make an already very difficult task near-impossible in practice.

How has the RBA done?

Taken from 1993 as the start of RBA targeting a 2-3% inflation range with substantive policy and operational independence (although you could use 1994 or 1995 or 1996 with the same results), and adjusting for the one-off GST impact in 2000 (as it was not ‘inflation’ but a one-off tax change) we get the following inflation results for the RBA:

Annual inflation outcomes per quarter and per year

Annual (ie rolling four-quarter) inflation has only been within the 2-3% target range just 32% of quarters, and just 36% of calendar years. So the RBA scores just 3 out of 10 for short-term inflation targeting. A quick look at the chart shows only around one third of the dots are in the target (green) range.

However, that is actually not bad given the enormity and impacts of the global macro challenges faced by central bankers over the past 30+years.

Decade averages

Quarterly and yearly inflation measures are rather harsh tests given the volatile nature of inflation components and the data lags involved - from measurement, reporting, decisions, and impacts.

Therefore if we view inflation outcomes decade by decade, inflation has been within the target range each decade:

• • • Inflation averaged 2.3% pa in the 1990s,
    • 2.8% pa in the 2000s,
    • 2.1% pa in the 2010s.
    • So far in the 2020s inflation has averaged 3.8% pa to date. This above target but we have some years left to run for this decade, so it is too early to call.
    • However, for the 10 years to December 2025, inflation averaged 3.0%, which is just inside the target range.
    • Therefore the RBA gets full marks on decade average inflation outcomes.

Overall inflation experience

Overall inflation over the whole period has averaged 2.6% per year (or 2.7% pa if you don’t adjust for the one-off GST jump in 2000). This is in the middle of target inflation range – so the RBA scores 10 out of 10 for long-term inflation targeting.

Further thoughts

I have concluded that the RBA has done a pretty good job in achieving its mandated inflation target. Overall at least 8 out of 10.

However, I do not agree with the RBA’s inflation goal. (Government sets the goal, not the RBA.)

There are two serious questions I will leave for another day -

The first is why RBA has been given the highest inflation target (ie loosest monetary policy target) in the developed world?

For example, from Federation up until inflation targeting in the 1990s, Australian inflation averaged 1% higher than the US (4% pa in Australia versus 3% pa in the US), for a variety of structural reasons, including our unique system of centralised wage fixing, which was a problem pointed out by Keynes in 1936 and still a problem today (Keynes, ‘General Theory of Employment, Interest and Money’, London, Macmillan, 1936. pp. 267-9 in my 1973 edition).

Now, with specific inflation targeting regimes in place, the RBA’s target is still higher than the US target, which pretty much guarantees Australian inflation will remain higher than the US in future as well (ie looser monetary policy, higher interest rates, and weaker currency).

Is there a valid policy reason for this? I say No.

The second question is why the RBA and other central banks aim for positive inflation at all?

With fiat/paper currencies, inflation is government-endorsed theft of the wealth of its citizens. Inflation is the most regressive form of tax imaginable, as its hits low income earners and the poor much more savagely than high income earners and the rich. Inflation is essentially a deliberate and pernicious transfer of wealth from creditors (bank depositors, savers) to debtors (asset owners and especially geared-up asset owners, and governments).

The Reserve Bank Act (initially in 1959 and still now) mandates ‘stability of the currency’ which means stable prices. ‘Stable’ prices means ‘flat’ prices, not constantly inflating prices, which is deliberate, constant, government-mandated, forever-compounding theft from its citizens.

Is there a valid policy reason for this? I say No, for reasons that go back to Nicholas Oresme, St Thomas Aquinas, and even Aristotle. But that is another story for another day.

Keen to hear your thoughts!

Especially from ex-central bankers among you. You know who you are!

‘Till next time – safe investing!

Some further reading - 

For Australia’s current inflation and interest rate picture – see

• I wrote a year ago that the RBA should not cut rates. It did, but now has to correct its mistake – again! (29-Jan-2026)

For my most recent montly report on local and global markets for Aussie investors see –

• January 2026 snapshot – essential wrap-up of global markets for Aussie investors (1-Feb-2926)

For asset class returns in 2025 –

• 2025 asset class returns – third straight year of double-digit returns for lazy, passive, diversified investors! (9-Jan-2026)