Rate cut brings rapid relief but RBA’s statement contains sting in the tail

The Reserve Bank has delivered home buyers and businesses some respite – but a loaf of mouldy bread to Anthony Albanese and Jim Chalmers.

While it may never admit to erring at its July meeting, where six members of the bank’s interest-rate-setting board held doubts about the path for inflation, the three who voted to cut the cash rate have been vindicated.

More cuts are likely by year’s end. At least one, maybe a couple. That would mean a cash rate of around 3.1 per cent, more than a full percentage point lower than at the start of 2025. On a $600,000 mortgage, it equates to a saving of about $500 a month.

Given the turmoil caused by the current occupant of the White House, that’s a relatively smooth path.

As the RBA notes, people have actually been putting away their cash rather than rushing out on a spending spree. That’s helped the bank’s efforts to bring down inflation.

But just as in any substantial economic change, there are winners and losers in this story.

The Reserve used its quarterly update of key economic forecasts – the numbers that ultimately guide the bank – to reveal it was downgrading its long-term assumption on productivity growth.

Productivity is the real secret sauce to how the economy and living standards improve. Without productivity, we’d all be working on our small allotments, raising a couple of pigs and wearing rough-hewn woollen shirts.

Next week’s economic roundtable is being held to find ways to lift productivity growth, which in Australia, like the rest of the world, has been sliding for the past two decades.

The Reserve Bank now reckons its best guess for productivity growth is about 0.7 per cent over the next two to five years. That’s almost a third lower than what it had been assuming.

Governor Michele Bullock was keen to point out the new assumption was a way of resolving a “puzzle” surrounding the bank’s key forecasts.

She argued that the main game was the cut in the cash rate, inflation easing and unemployment remaining relatively low.

But as the governor also noted, productivity is what makes the economic world go round. And here was the Reserve Bank saying oops, it’s not looking so good.

The bank gave an example of the importance of productivity growth. In the 1960s, the average person had to work at least 10 minutes to afford a loaf of bread. Today, they only need to work about four.

If productivity growth had been a third lower, then instead of four minutes to buy that artisanal loaf, you’d be working about six minutes to get a spongy home-brand version.

Low productivity means the economy can’t grow as fast (hence the bank has sliced its economic growth forecasts by about 0.2 percentage points from 2027 onwards). Small beer, you might say.

But it also means a hit to the back pocket.

“Slower productivity growth implies that the rate of wages growth that can be achieved over the long run without generating inflationary pressure is lower,” it noted.

The bank has been fretting about the slowdown in productivity growth for more than a decade. But the combination of its collapse (it’s fallen by 20 per cent in the mining sector alone over the past five years), the downgrade of the assumed rate of growth, and next week’s roundtable has allowed the RBA to have a real examination of the issue.

That examination includes getting feedback from the thousands of businesses that the Reserve talks to in a bid to get a feel for the economy.

Interestingly, businesses told the bank that “regulation and labour availability” were key barriers to lifting their productivity growth over the past five years.

This makes some sense, given the rise in the number of rules put in place by all governments to deal with a host of problems since the turn of the century. But you only have to read a couple of recent royal commission reports to know businesses in certain sectors created the problems – aged care or banking – that prompted the extra regulation.

But the bank noted “some firms” said that technology was important to drive efficiencies and productivity gains.

If only “some firms” realise that global economic history since the industrial revolution has been driven by technology, then there is a problem in the mindset of Australian business that no three-day love-in around the federal cabinet table is going to solve.

Bullock and the bank have drawn attention to a problem that’s been festering away in the back of the Australian economy like six-week-old bread.

No amount of fine oratory from Albanese and Chalmers at their economic roundtable will cut through that stink. They’ll need a proper clean-out.

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