As at the March quarter 2009, Australia's annual inflation rate was 2.5%. Interest rates in Australia have been significantly reduced in response to the global financial crisis. The cash rate target as at April 2009 stood at 3% following six cuts in eight months. Monetary policy easing in Australia has been more effective than in other countries, with financial institutions passing on the bulk of official interest rate cuts to borrowers.

A number of major economies continue to experience lower rates of inflation than Australia, with some even entering a period of falling prices as global activity contracts. These countries have generally required very low interest rates to stimulate domestic demand and investment, in contrast to Australia, which entered the current global downturn from a position of strong domestic demand, record high business investment and labour shortages. The Reserve Bank of Australia (RBA) anticipates that Australia’s inflation will decline over 2009, led by falling commodity prices and slowing global and domestic demand.

Since 1993, the RBA has targeted monetary policy toward an average inflation rate of between 2% and 3% a year over the medium term. This is considered sufficiently low that it will not distort economic decisions in the community. The inflation target provides discipline for monetary policy decision making in Australia, and serves as an anchor for private sector inflation expectations.