MNI: Weak Productivity To Cramp RBA's Easing Path - Ex Staff

Services price inflation driven by weak productivity growth is likely to complicate the Reserve Bank of Australia’s 2026 outlook and potentially limit the scope for easing this year to only two further 25-basis-point cuts to the 3.85% cash rate, former RBA staffers told MNI.

The “mission accomplished” tone of the Bank’s May decision was misplaced, said John Simon, adjunct fellow at Macquarie University and former head of the RBA’s economic research department between 2014–2024, arguing that market pricing for a 3% cash rate by December would represent an expansionary setting in a still-inflationary environment. (See MNI RBA WATCH: Board's Dovish Turn Included Debate Of 50bp Cut) 

With the neutral rate close to 3.5%, the RBA is likely to deliver no more than two cuts this year, aligned with the Statements on Monetary Policy due at the Aug 11-12 and Nov 3-4 meetings, he said.

Simon also flagged upside risks to the RBA’s inflation projections from a tight labour market, weak productivity, and strong wage growth. He expects core inflation to push toward 3% through 2026, above the RBA’s 2.6% forecast.

The Fair Work Commission this week increased the minimum wage by 3.5% for about 2.5 million workers, while National Accounts data released on Wednesday showed a 1% y/y fall in productivity to the March quarter, well below the RBA’s assumption of 0.9% growth by year-end.

“The RBA’s productivity assumptions are optimistic,” Simon said, warning that the upcoming renewal of multi-employer enterprise bargaining agreements will also intensify wage pressures. “Unless productivity growth returns solidly, it'll probably be next year before it all starts coming home to roost. That kind of tension gives you essentially a run of three-point-something rather than two-point-something on inflation.”

FORWARD-LOOKING RBA

Callam Pickering, APAC senior economist at Indeed.com and former RBA analyst, said weaker-than-expected Q1 GDP growth of 0.2%, 20bp below forecasts, will likely prompt a cut in July, followed by another in August or September.

“Labour is very tight and wage growth is strong, normally you wouldn't cut rates in that environment,” Pickering said. “But it does appear as though the data is taking a back seat to geopolitical and economic uncertainty, which is the right decision.”

The Bank’s policy shift in May marked a sharp contrast from earlier practice, signalling a greater emphasis on forward-looking risks rather than current data, he noted.

Still, Pickering cautioned that sustaining inflation within the 2-3% target range will be difficult if productivity fails to improve. “You can get there temporarily, but staying there is going to be really tough if wage growth remains above 3%, which it will for the next 12 months. All of those wage gains are flowing through to inflation.”

Simon added that while a slowing global economy may reduce goods prices, it will not be enough to offset domestic services inflation. “Goods are only about 30% of the economy,” he said. “It’s services where inflation is entrenched, and where the RBA has influence, but doesn’t seem to be acting forcefully.”