RBA cuts rates but warns of productivity drag on living standards
Markets cheer the latest rate cut to 3.6 per cent, but the Reserve Bank's stark productivity downgrade signals tough times ahead for Australian living standards.
The Reserve Bank delivered its quarter-point interest rate cut as expected, but slashed its productivity and growth estimates, suggesting constrained living standards in the years ahead.
Unlike July’s contested decision where three board members dissented, Tuesday’s cut was unanimous, reflecting growing confidence that inflation is sustainably returning to the 2-3 per cent target band.
Trimmed mean inflation fell to 2.7 per cent in the June quarter, broadly in line with RBA forecasts.
The S&P/ASX 200 hit a record high of 8885.7 points, the Australian dollar slipped 0.3 per cent to US64.95c and government bond yields fell slightly.
However, money market pricing on further rate cuts was little changed, with another 25 basis points fully priced by year-end and the cash rate expected to reach 3.1 per cent by February 2026.
CBA senior economist Belinda Allen noted the statement “reads like a board that is comfortable with both the current state and the outlook for inflation” — a marked shift from the cautious tone of May and July meetings. “The lingering risks appear to be gone,” she said.
The RBA’s decision to slash its long-term productivity growth assumption from 1 per cent to 0.7 per cent annually was a sobering reality check for the Australian economy.
The downgrade, which reflects the 20-year average for non-farm labour productivity, explains why the RBA had consistently overestimated economic growth while hitting its inflation and employment forecasts.
Governor Michele Bullock acknowledged the implications during her press conference, noting that slower productivity growth means “real wages are not rising very much”.
Crucially, Ms Bullock said that without the forecasts of additional easing, “inflation would be lower, and the labour market would be worse” - meaning the RBA would miss both its targets without further rate cuts.
“The way we grow our living standards is through productivity,” she said, emphasising that lifting productivity was beyond the RBA’s control and remained a challenge for government and business.
The productivity downgrade mechanically lowered GDP forecasts, with growth now expected at just 1.7 per cent by December 2025, down from 2.1 per cent previously. The RBA now assumes potential growth sits around 2 per cent annually - Australia’s new economic speed limit.
CBA’s Ms Allen maintains a “slightly more optimistic outlook for the economy than the RBA, suggesting less cuts will be needed to stabilise core inflation around target.”
Part of her optimism stems from “green shoots in the consumer” that suggest household spending may recover more strongly than the central bank anticipates.
But Capital Economics’ head of Asia-Pacific Marcel Thieliant expects deeper cuts, forecasting the cash rate will fall to 2.85 per cent by mid-2026.
“While the bank revised down its near-term forecasts for GDP growth, we think it is still a bit too optimistic,” he said.
HSBC chief economist Paul Bloxham highlighted competing forces on inflation, with weaker productivity supporting higher domestic costs while global trade tensions provide a disinflationary impulse.
His working assumption is that the RBA will be able to cut to 3.1 per cent by the March quarter as the global disinflation arrives.
But he warns that weak productivity and a strong rise in the domestic cost base in a fully employed economy may leave domestic inflation too high to allow further rate cuts.
Attention now turns to wages data released Wednesday and July labour force data on Thursday.
AMP chief economist Shane Oliver expects the RBA to continue cutting rates quarterly, taking the cash rate to 2.85 per cent by May next year.
“The cash rate is still above most of the RBA’s estimates of the neutral rate, which averaged around 2.8 per cent,” he said.
Dr Oliver pointed out that the latest rate cut would reduce monthly mortgage payments by roughly $105 on a $660,000 mortgage, but only reverses about 23 per cent of the payment increases imposed during the 2022-23 tightening cycle.
Governor Bullock stressed that the board would remain “attentive to the data” and assess conditions meeting by meeting, refusing to rule out back-to-back cuts if warranted.
The RBA has three more meetings scheduled this year, with the next on 29-30 September.
The productivity challenge underscores a broader structural shift facing the Australian economy.
With the sustainable rate of growth without triggering inflation now permanently lower, the path to higher living standards has become significantly more difficult.
This reality will feature prominently in next week’s productivity summit, where Ms Bullock is scheduled to deliver opening remarks on economic resilience and the role of reforms in lifting productivity growth.
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