‘Persistently weak’ productivity growth making inflation fight more difficult: RBA
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The news: The Reserve Bank of Australia’s monetary policy board is concerned that “persistently weaker-than-expected productivity growth” could inhibit efforts to return inflation to the target band and remains alert to the potential need to lift the cash rate again.
The context: According to meeting minutes from the monetary policy board’s meeting on 15 and 16 June, ahead of the decision to hold interest rates steady, “members noted the implications of persistently weak productivity growth for the economy’s supply capacity and sustainable growth rate”.
While they all had different views to the extent that current capacity pressures are creating inflationary pressure, the members agreed that the direction of productivity growth is among the domestic risks to managing inflation.
National accounts data for the March quarter “revealed further weakness in economy-wide productivity growth”, which also meant that “growth in unit labour costs remained above its average over the inflation-targeting period”.
Short-term inflation expectations had increased in prior months following the impact of the US-Iran war and were “larger than would be expected from their past relationship with inflation and fuel prices”.
Meanwhile, while longer term measures are consistent with achieving the inflation target, “unions’ long-term inflation expectations were an exception, having picked up sharply in May”. This is consistent with the response to major post-Covid economic and supply chain disruptions in 2022.
The members also noted the risk of a potentially material weakening in housing markets following three interest rate hikes earlier this year and the government’s tax changes if it leads to a slowing in consumption growth.
They flagged the set of risks associated with conflict in the Middle East as there are “credible scenarios for the evolution of the conflict that could result in higher inflation and lower activity than in the May baseline forecasts”.
There is also the potential for “sustained high oil prices to feed through more fully into price- and wage-setting behaviour, even if fuel prices subsequently abate”.
The source: RBA monetary policy board June meeting minutes
