RBA Fears Capacity Constraints Could Limit Scope For Rate Cuts

By James Glynn

SYDNEY--The Reserve Bank of Australia has warned that the path to more interest rate cuts could be narrow given elevated levels of capacity utilization in the economy and an outlook that includes uncomfortably high inflation well into next year.

"The Australian economy is in a unique situation," RBA Deputy Governor Andrew Hauser said in a speech to money market participants on Monday.

The economy has seen one of the sharpest disinflations in decades and it has been achieved without a contraction in economic activity, and with the employment share at an all-time high, he said.

"That is a great outcome - but it also means that the recovery in GDP growth began last year with the highest level of capacity utilization in any recovery over the past 40 years," Hauser added.

"There is room to debate what that means for the precise stance of monetary policy in the near term," Hauser said.

"It's possible that the economy may find itself boxed in by its own capacity constraints, like a racehorse trapped against the course fence, unable to surge forward," he added.

"On that view, there may be little scope for demand growth to rise further without adding to inflationary pressures, and hence there may be little room for further policy easing," Hauser said.

The RBA's latest projections show inflation settling very slightly above the midpoint of the 2% to 3% target range if the cash rate follows a market-derived path of one more interest rate cut, he said.

The RBA has cut interest rates three times since February, but it passed on an opportunity to deliver a fourth cut at a policy meeting last week, citing a rise in inflation in the third quarter that exceeded its own expectations, and those of nearly all market economists.

The environment in which the RBA finds itself in strongly suggests that the easing cycle could already be over after just three reductions, which have seen the official cash rate lowered by just 75 basis points to 3.60%.

RBA Governor Michele Bullock highlighted last week that the central bank did not tighten interest rates nearly as much as other central banks when inflation rose after the pandemic, so it might be that the easing cycle might be shallow.

Hauser said that years of weak productivity growth meant the speed limit of the economy was lower, increasing inflation risks if the economy runs too hot, and curbing the RBA's ability to cut interest rates.

Still, if productivity could be raised through a process of economic reform, the economy would be "off to the races," he said.

"Expanding productive capacity further will require time and investment - and here there is work to do," Hauser said.

Real business investment has been flat over the past 18 months, and capital expenditure intentions suggest little or no growth over the current fiscal year. And private investment, which also includes housing investment, remains well below historic peaks, he said.

-Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

November 09, 2025 18:46 ET (23:46 GMT)