"It remains to be seen if future growth in demand will be sufficient to put pressure on the economy's supply capacity and lift inflation in a reasonable timeframe," he said. "It is certainly possible that this is the outcome. But if demand growth is not sufficient, the [RBA] board is prepared to provide additional support by easing monetary policy further." Markets put the chance of a rate cut at the RBA board's next meeting on August 6 at just 20 per cent, but they fully expect the cash rate to be reduced to 0.75 per cent by its November meeting. They also put the chance of the cash rate reaching 0.5 per cent at 50:50 by the middle of next year.

Dr Lowe used his address to reject some suggestions for the RBA to change its inflation target, which is currently 2 to 3 per cent. Its preferred measure of inflation, the trimmed mean, has not been within the target since early 2015. Loading Declaring the RBA was not made up of "inflation nutters", he said there would be dangers in either reducing the inflation target or actually increasing it. "Some have argued that a lower inflation target would be a good idea given the ongoing low rates of inflation; that we should adjust our formulation of 2-3 per cent, on average, over time," he said. "Lowering the target might have the short-run advantage of allowing us to say we have achieved our goal, but shifting the goalposts hardly seems a good way to build long-term credibility. Shifting the goal posts could also entrench a low inflation mindset."

Dr Lowe defended the bank's decision not to cut rates earlier. Until earlier this year, the bank had been laying the groundwork for a possible rate increase. He said a surprising increase in the number of people in the workforce meant the overall unemployment rate had not fallen as expected. This had led to less pressure on wages and overall inflation. Loading Replay Replay video Play video Play video "More demand for workers has been met with more labour supply. This has contributed to the subdued wage outcomes over recent times, which in turn has contributed to the low inflation

outcomes," he said. "The more flexible supply side means that employment growth can be stronger without

fears of overheating."