Monetary policy in 2015

The role of the Reserve Bank of Australia (RBA) in monetary policy is to maintain the rate of inflation, on average, at 2% to 3% over the economic cycle.

The tool that the RBA has to achieve this is the interest rate (cash rate). They can adjust the cash rate to influence the level of Aggregate Demand in the economy. Lower interest rates encourage consumption, investment and exports (through a lower exchange rate). The higher the level of Aggregate Demand the greater is the upward pressure on inflation. 

So the RBA monitors the level of economic activity in the economy (such as the rate of growth of GDP and other indicators of Aggregate Demand such as consumer spending) and attempts to set interest rates so that inflation meets its target.

The article below looks at the likelihood of an interest rate cut in Australia soon. This is based on low inflationary pressures particularly the fall in oil prices and the fall in the rate of activity in the construction industry. 

There are many influences on the rate of inflation, often these influences conflict (a mixture of 'headwinds' and 'tailwinds'), but at present the overall effect seems to be for lower inflation. That demands an interest rate cut to encourage higher Aggregate Demand.

The Guardian article is here

Greg Jericho's summary of important changes in the Australian economy in 2014 is below, which gives some wider context.

Jericho's review is here