Key RBA concern eases ahead of crucial inflation print
Australian firms are noticing a significant easing of business pressure, dampening some of the impact of calls for the Reserve Bank to raise interest rates.
But while capacity utilization fell slightly in December, it remains above the long-term average and will not prevent the central bank from increasing borrowing costs if it feels inflation data due on Wednesday is still too hot.
Capacity utilization, which measures how close a business is to its maximum production potential, fell 0.3 percentage points to 83.2 percent in December, according to NAB’s monthly business survey.
NAB chief economist Sally Auld said capacity utilization remained high and broad-based, with five out of eight sectors still above their long-term averages.
“While the small decline in capacity utilization in the month would be welcome, this is unlikely to address the RBA’s concerns that the economy is straining against capacity constraints,” he said.
“This is particularly the case given growing evidence that domestic demand is stronger than expected in the fourth quarter of 2025.”
The importance of capacity utilization in the RBA’s thinking was highlighted in a speech by the bank’s deputy governor, Andrew Hauser, in November.
Speaking shortly after the Melbourne Cup, Mr Hauser said the Australian economy was at risk of being “shut down” due to its own capacity constraints.
He said without a recovery in productivity the Australian economy could not grow faster without increasing inflation.
This means the RBA will be forced to tighten monetary policy to control price growth.
Since then, consumer demand has been stronger than the RBA expected and inflation has remained above its 2-3 per cent target range.
Minutes of the RBA’s December interest rate meeting revealed that board members followed the NAB’s survey closely and noted that “capacity constraints have risen well above historical averages”.
NAB said business confidence rose slightly in December to three points, despite growing fears that the RBA would be forced to raise interest rates to cool the economy.
Business conditions also tightened, with both measures trending above their long-term averages.
Cyclically sensitive industries such as retail and manufacturing were the sectors that improved the most.
“The survey is consistent with the view that momentum in the Australian economy increased in the fourth quarter of the year,” Dr Auld said.
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