The Reserve Bank of Australia (RBA) signalled that more interest rate cuts are likely over the coming year, but the pace will be guided by incoming data.
According to minutes of its August board meeting, the central bank said it expects some further easing will be needed to maintain full employment while returning inflation to the 2–3% target band. However, it stressed that decisions would be made “on a meeting-by-meeting basis” and shaped by how new data alters the assessment of risks.
Members discussed reasons for adopting a gradual approach, pointing to a labour market that “remained a little tight”, inflation projections slightly above target in the medium term, and early signs of recovering private demand. Uncertainty around the economy’s spare capacity and the neutral interest rate also argued for caution.
At the same time, members acknowledged scenarios where faster cuts may be justified. These included evidence that the labour market was already balanced, which could lead to inflation undershooting target, or if global conditions weakened sharply and domestic demand failed to hold up.
Productivity challenges
The minutes also revealed a downgrade to the RBA’s medium-term productivity growth forecast to 0.7%, from 1% previously. Members agreed the structural headwinds that had weighed on productivity over the past two decades were likely to persist.
Despite the weaker outlook, the bank judged the change would not materially alter inflationary pressures, noting that slower productivity growth would also reduce supply capacity and wage growth in line with historical trends. “Members noted that the downward revision…was judged not to have implications for the degree of inflationary pressure, and hence for the stance of monetary policy,” the minutes said.
Policy implications
The RBA acknowledged it has consistently overestimated productivity in past forecasts, with the latest monetary policy statement containing nearly 300 references to the issue. That acknowledgement came just days before the Albanese government’s economic reform roundtable, which will address productivity at its lowest level in six decades.
The discussion underlines the delicate balance the board faces: while weaker productivity dampens long-term growth potential, it does not, on its own, justify a more aggressive rate-cutting cycle. Instead, the central bank will continue to weigh global risks, labour market dynamics and inflation data in deciding whether to move cautiously or accelerate cuts in the year ahead.