Borrowers hoping for more cash rate cuts could be left waiting longer than they think while the Reserve Bank of Australia struggles to push back against the nation’s weak productivity levels.
Speaking in Sydney this week, assistant governor Sarah Hunter said supply-side improvements that tend to keep inflation in check can’t be relied on anymore.
This is down to productivity, which has been weak in Australia since the mid-2000s – an issue shared with comparable economies overseas.
It spells bad news for homeowners, property seekers and mortgage holders who were hoping productivity weakness would not stand in the way of at least one more rate cut in 2025.
The RBA had expected productivity would pick up but was forced to downgrade its medium-term growth assumption in August after national accounts figures found 2024-25 was still the weakest financial year for growth in Australia since the early 1990s, excluding Covid.
Ms Hunter said the August downgrade had implications for the outlook of wages growth, even though it had little to no effect on its labour market expectations.
“Productivity growth is the determinant of sustainable real wages growth,” she said. “It allows nominal wages to increase without leading to a build-up in inflationary pressure.”
RBA assistant governor Sarah Hunter has laid out the importance of productivity for keeping inflation stable. Picture: supplied
So, while wages can continue to grow without pushing up inflation, there is a cap on this.
“This again underscores the importance of productivity growth in driving ongoing improvements for living standards for Australians,” Ms Hunter added.
The government has been under pressure in recent months to take more decisive action on boosting productivity and held its Economic Reform Roundtable event in August with one day dedicated specifically to resilience and growth. The RBA plays a very different role, however.
“There is very little that central banks can do to directly influence productivity over the medium term,” Ms Hunter said. “Instead, our focus is on setting monetary policy to maintain price stability and achieve full employment, creating economic conditions that are conducive for investment and innovation to thrive.”
The bank has followed a cautious cut-hold-cut-hold pattern all year, most recently holding the cash rate at its September meeting.
Ahead of the next decision on 4 November, the RBA is set to benefit from the September quarterly inflation data and updated labour market figures when it comes to make a decision to cut or hold.
But in a blow to households, Ms Hunter flagged underlying inflation is "likely to be stronger than we anticipated."
Thanks to a slight recent uptick in headline inflation, Commonwealth Bank and National Australia Bank have both forecast rate holds for the rest of the year, potentially lasting through until next May.
“We will continue to monitor outcomes and continually reassess our view on the outlook for the economy,” Ms Hunter said. “The board will adjust policy as appropriate as new information comes to hand.”
The article first appeared on Mortgage Choice and has been republished with permission.
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