MNI POLICY: RBA Relief As Productivity Weakness Unwinds

The Reserve Bank of Australia is counting on a further 0.4 percentage point reduction in total hours worked alongside modest GDP growth in Q4, which will drive productivity growth higher, a key focus as the bank aims to pull inflation back to its 2-3% target band, MNI understands.

A dip in productivity growth, which has concerned the RBA and caused some former officials to question its forecasts, has begun to ease, as a temporary surge in hours worked by less-skilled employees drawn into a hot-running economy draws to a close. While some former staffers have suggested that uncertainty over productivity growth poses a threat to the RBA’s forecasts and could prompt it to leave the cash rate steady at 4.35% over 2024, the central bank remains confident it will return to its long run average of about 1%. (See MNI: RBA To Hold Rates Despite Soft Data - Ex Staff)

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.