‘Boxed in at the rail’ – RBA Deputy reveals why interest rate cuts could be delayed
The Reserve Bank’s Deputy Governor has warned Australia's economic strength could delay interest rate cuts, with the nation facing 'unusual' capacity constraints.
Australians hoping for rate cuts will have to keep holding their breath, after the Reserve Bank Deputy Governor warned this morning the economy finds itself “in an unusual place”.
Speaking to investors at the UBS Australasia Conference in Sydney, Deputy Governor Andrew Hauser said Australia’s economy was performing strongly, but warned that strength could be boxing the nation in.
Last week the RBA held official rates steady at 3.6 per cent after shock inflation figures indicated the economy is running hotter than the bank expected.
He said the bank faces “an unusual challenge”, with growth rebounding while the economy was already operating near full tilt. Meaning interest rate cuts may be some way off.
“The recovery in GDP growth began last year with a higher level of capacity utilisation than at the start of any other recovery in over 40 years,” Mr Hauser said. “That’s a real achievement … but it also poses a big, and pressing, question. Could Australia find itself trapped on the economic rail – boxed in by its own capacity constraints?”
“Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races.”
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Mr Hauser said Australia was in a unique position, with “extraordinary mineral resources, old and new”, world-leading universities, a huge superannuation savings pool and “one of the lowest public debt burdens in the G20”.
“If that doesn’t scream investment potential, I don’t know what does,” he told the audience.
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The RBA has already cut the cash rate by 75 basis points this year, but Mr Hauser said policy would need to stay tight enough to ensure inflation continues to return sustainably to the bank’s 2-3 per cent target range.
“Achieving that goal will require policy to be restrictive enough to keep shrinking the gap over that period,” he said.
He also outlined three potential “tracks” for the future, the first where weaker than expected demand and wage growth justifies more cuts, a ‘Track B’ where the economy is “boxed in on the rail” by tight capacity and inflation pressures leaving the Bank nowhere to move; and Track C, where stronger productivity and investment see growth take off.
The RBA’s latest forecasts assume one more 25 basis-point cut in the cash rate a with inflation settling only slightly above the midpoint of the target band by 2027.
Hauser said the long-term challenge for Australia was not just keeping prices in check but expanding the economy’s productive capacity through investment and productivity gains.
“If we fail to do so, we may find ourselves boxed in on the rail,” he said. “If we succeed, we could be off to the races.”
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