Slowing economy could shut the door on more rate hikes
The Australian economy is heading towards its expected slowdown.
As the country’s decades-long productivity growth woe shows no signs of improving, Federal Reserve governor Michele Bullock admitted the harsh truth after the central bank’s monetary policy board kept interest rates steady on Tuesday.
Inflation is still very high, and the only way for it to decrease is for economic growth to slow down and for households to bear the cost.
“We don’t anticipate the economy will shrink this quarter,” Ms Bullock told reporters after the RBA’s first meeting of the year that did not result in a rate hike.
We predict that growth will slow down, but growth must also slow down.
“The main reason for this is that demand is high, and we will not be able to reduce inflation unless demand grows slower than the supply side of the economy for a while.”
Three interest rate hikes in 2026, the Middle East oil shock and tax changes in the budget were damaging the housing market and the economy in general.
This will help close the gap between supply and demand that worries Ms Bullock.
NAB chief economist Sally Auld said this was one of the reasons why the RBA board was comfortable enough to keep the cash rate steady at 4.35 per cent while it waited to see how the Middle East conflict played out.
NAB expects the Central Bank to remain on hold in 2026 and start cutting interest rates in 2027.
Dr Auld said capacity utilization, a key metric influencing how price pressures are transmitted through the economy, was surprisingly not mentioned by Ms Bullock in her post-meeting press conference.
He said NAB’s monthly business survey recorded one of the largest six-month declines in capacity utilization in the last 15 years, excluding the pandemic, indicating that the economy was weakening faster than expected.
“We are perhaps less concerned about the upside risk in inflation than we were just a month or two ago,” Dr Auld told AAP.
While low growth is good for the rate outlook, it’s still bad for households.
Ms Bullock said in August the RBA cut its medium-term productivity assumption to 0.7 per cent, meaning the economy could not grow faster than two per cent a year without pushing up inflation.
He said high inflation along with low productivity meant workers had difficulty achieving real wage increases.
Stagnant real wages mean stagnant disposable income, which means stagnant living standards.
Finance Minister Jim Chalmers acknowledged the threat that economic discontent would push voters further towards populist parties such as One Nation.
“Obviously, when people are under pressure, they will express that in a variety of ways, including in opinion polls,” he said.
“I think one of the defining concerns in our economy is around this intergenerational challenge around housing.
“It would now be easier but wrong for us to leave home tax regulations as they are, which would leave more and more generations without the Australian dream of owning their own home.”
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