The Reserve Bank has warned the Australian economy is at risk of becoming trapped in a cycle of low growth, severely limiting – or perhaps even removing – the chance of further interest rate cuts.
In a speech to investors this morning, deputy governor Andrew Hauser said that, in part because the central bank started cutting rates when there was little spare capacity in the economy, and therefore little capacity for rate cuts without spurring on inflation, Australia may “find itself trapped on the economic rail”.
That, in turn, could spell the end of any more interest rate cuts this cycle.
The Australian economy could find itself trapped in a cycle of subdued growth, providing little potential for more interest rate cuts. (Glenn Campbell)
“The economy may find itself boxed in by its own capacity constraints, like a racehorse trapped against the course fence, unable to surge forward,” he said.
“On that view, there may be little scope for demand growth to rise further without adding to inflationary pressures, and hence there may be little room for further policy easing.”
The RBA, as expected, kept rates on hold at 3.60 per cent last week.
And while some economists are still banking that more relief will be handed down in time – Westpac, for example, is currently forecasting cuts in May and August to bring the official cash rate down to 3.10 per cent – others, such as those at Commonwealth Bank, believe the RBA is done cutting.
That’s due to an unexpected jump in inflation, with the headline figure reaching 3.2 per cent and underlying inflation up to 3.0 per cent for the September quarter.
Andrew Hauser called for an increase in private investment to help spur productivity growth. (Louise Kennerley/AFR)
However, Hauser admitted there is a chance those price rises are temporary and may quickly ease off.
That would bring another rate cut back into play.
“Maybe there’s more capacity today than the estimates suggest; maybe the outlook for demand is weaker (opening up a larger future margin of spare capacity); or maybe capacity pressures have only a weak effect on inflation,” he said.
“On this view, the Australian economy still has ground to make up – and further policy easing may be necessary at some horizon.”
If the economy is boxed in, Hauser warned, the only escape route would be through an increase in productivity, which has been slowing in Australia and almost all other developed economies in recent years.
He said a pick-up will take not just time, but also an uptick in private investment.
“Here there is work to do,” Hauser said.
“Real business investment has been flat over the past 18 months, and capital expenditure intentions suggest little or no growth over the 2025/26 financial year.
“And private investment, which also includes housing investment, remains well below its peak of the mining boom as a share of GDP.”
The RBA’s last interest rate decision of the year will be handed down on December 9.