Australia's tight labour market killed productivity growth, but this was a temporary effect which has begun to unwind, MNI understands.
Over the September quarter, output per hour worked increased about 1%, and productivity growth rose to 0.9%. (See chart) Any deviation in Q4 from the RBA's expectations could force the central bank to rethink its wider forecasts.
Productivity has represented a consistent focus for the RBA over the last 12 months. The Reserve believes that incremental output from individual workers fell as hours worked increased significantly beyond full time and has called for greater attention on the issue considering recent strong wage growth to help contain inflationary pressure. (See MNI: Productivity, Wages Keep Pressure On RBA - Ex Officials)
The RBA’s most updated Statement on Monetary Policy shows unemployment at 4.4% by June 2025 and labour productivity to peak at 3% by June, before slipping to 1.1% 12 months later. However, former staffers have told MNI the RBA's productivity forecasts represent a risk to the Reserve's forecasts
Business partners that feed qualitative information into the RBA have told the Reserve new technologies, such as artificial intelligence, will continue to help improve productivity. The RBA also remains confident government and Productivity Commission initiatives will also improve the metric over time.
CASH-RATE ASSUMPTIONS
The Reserve has begun publishing its future cash rate assumptions within its statement, despite the Bank using the metric internally since 2022. Its macroeconomic forecasts are framed against the assumption, which is calculated as an average of the market estimate and a collection of external economist predictions.
The RBA’s assumption has the cash rate at 3.9% by the end of the year, despite Governor Michele Bullock’s more agnostic stance presented following the Bank’s February decision to hold at 4.35%.
Current overnight index swaps pricing has the cash rate at 3.8% by December.
The RBA does not view the assumption as a guide to board thinking, but a snapshot of how it viewed the world in early February. This view has changed and RBA officials will revise it again as the economy shifts. The Reserve will also periodically review the methodology behind the assumption.
The Bank next meets March 18-19.