Reserve Bank of Australia deputy governor Andrew Hauser likens economy to trapped racehorse, gives rates hint

Reserve Bank of Australia deputy governor Andrew Hauser has suggested supply constraints in the economy could prevent the central bank cutting interest rates next year.

Even if spending remains sluggish, limited available labour and other restraints could stop cuts that seemed inevitable a few months ago, the economist told an investment conference in Sydney.

While unemployment is low by historic standards, economic growth and productivity remain weak, making the economy like a racehorse unable to speed up because it is trapped behind other horses, Mr Hauser said.

Hinting about the direction of interest rates, Mr Hauser suggested the 3.6 per cent RBA official rate was below the neutral rate — which is between 4 and 5 per cent and neither stimulates, nor restricts demand in the economy.

“It is possible to write down a neutral rate that is, what about ‘four’,” Mr Hauser said. “You’d think that we’re on the easy side of that now. Financial conditions are clearly more close to neutral than we thought they were a while ago.”

National Australia Bank economists Taylor Nugent and Jessie Cameron said that while an inflation surge in the September quarter could be a one-off, there was a risk of no further interest rate cuts if supply constraints aren’t resolved.

They predict one more rate cut in May, but said there is a risk rates may have reached their lowest level at 3.6 per cent.

Mr Hauser described the inflation surge as a “challenge” and the labour market still tight.

“The economy may find itself boxed in by its own capacity constraints, like a racehorse trapped against the course fence, unable to surge forward,” Mr Hauser said.

“Could Australia find itself trapped on the economic rail like one of the riders in last week’s Cup — boxed in by its own capacity constraints? Or will it find ways to break free, through higher productivity and more investment in new capacity? If it does, we could be off to the races.”

Possible rate cut

Inflation has edged up but Mr Hauser hinted there could be a chance for rate cuts in 2026 if price pressures eased.

“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,” he told the UBS Australasia conference in Sydney on Monday.

“As I’ve set out today, there is room to debate what that means for the precise stance of monetary policy in the near term.

“Our latest projections show inflation settling very slightly above the midpoint of the 2–3 per cent target range if the cash rate follows a market-derived path of one more 25 basis point cut.”

He also suggested another rate cut was needed to boost Australia’s weak economic growth, with Gross Domestic Product growing by just 1.8 per cent during the last financial year as productivity barely expanded at just 0.2 per cent.

“The Australian economy still has ground to make up – and further policy easing may be necessary at some horizon,” he said.

No 2025 relief

A cut by Christmas, however, is looking unlikely. Mr Hauser said rate cuts in February, May and August would start boosting the economy in the final months of 2025.

“The normal lags in monetary transmission mean those cuts won’t have had much impact on activity during the first half of 2025,” he said.

“But they will play an important role in supporting growth from late 2025 as the impulse from public demand and last year’s tax cuts wanes.”

None of Australia’s big four banks is expecting the RBA to cut rates at its next two-day meeting on December 8 and 9.

Inflation in the year ended September 30 rose 3.2 per cent, which is above the RBA’s 2 to 3 per cent target. The consumer price index rose despite unemployment in September hitting a four-year high of 4.5 per cent, which was still low by historic standards.

“Monetary policy must be set not through the rear-view mirror but in anticipation of where the economy is going in the future,” he said.

“For inflation, that depends on the balance of demand and supply – and here we find ourselves in an unusual place.”

Bad forecasts

The RBA this month updated its forecasts to have headline inflation hitting 3.7 per cent by June 2026 for the first time in two years.

Headline and underlying inflation weren’t expected to settle at the mid-point of the 2-3 per cent target until at least early 2028.

The Reserve Bank left the cash rate on hold at 3.6 per cent this month, coinciding with Melbourne Cup Day, for the second consecutive meeting.

When it came to supply constraints, Mr Hauser said Australia risked being trapped without productivity improvements.

“The bigger picture challenge for the economy over the medium term, if we are to return to the sort of growth rates we have been used to, is how to create more supply capacity,” he said.

“If we fail to do so, we may find ourselves boxed in on the rail. If we succeed, we could be off to the races.”