Weak productivity is capping how fast the economy can grow
As the RBA board held interest rates steady for a second-straight meeting, it noted that it could do so because the economy had been slowing as expected.
Because Australia's productivity growth has been so slow in recent years, the central bank figures the economy can't grow above 2% a year without pushing up inflation - well below the trend growth rate of previous decades.
In its latest set of macroeconomic forecasts, released simultaneously to its rates decision on Tuesday, the RBA downgraded its labour productivity expectation for 2026 from 0.2% growth to a fall of 0.5%.
It came nearly a year to the day after the bank slashed its medium-term productivity from 1% to 0.7%.
Bullock says the RBA can only set monetary policy
Governor Michele Bullock lamented the RBA's inflation objective essentially consigned Australia to feeble economic growth.
"Productivity outcomes have been weak for some time, and continued weakness will constrain the economy’s ability to grow without generating high inflation," she said in her post-meeting press conference.
"We expect that a period of subdued growth in the economy will be required to bring inflation down sustainably."
Essentially, a rate cut was ruled out in the near term despite the economy showing signs of weakness.
While she was concerned that Australia's productive capacity was not growing, Bullock said the RBA could do nothing about it.
"We just have to set monetary policy to deliver low and stable inflation, and hope that low and stable inflation gives good economic conditions for businesses to be confident and consumers to be confident to go about their business."
