Reserve Bank of Australia deputy governor Andrew Hauser likens economy to trapped racehorse, hints at rate cut

Reserve Bank deputy governor Andrew Hauser has likened Australia’s economy to a racehorse trapped against a fence.

While unemployment is still low by historic standards, economic growth and productivity remain very weak, he said in a speech in Sydney.

This makes it hard for workers to produce the goods and services needed to boost economic activity. Inflation rises when the higher costs of production are passed on to consumers so employers can keep up with wage demands.

“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 again but Mr Hauser hinted there could be a chance for more relief 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

Relief 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 rearview 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.

In the question and answer session, he said it was “another mug’s game” determining the neutral RBA cash rate level where it was neither stimulating nor restricting economic activity.

But he suggested the global cash rate started with a ‘four’, which was where the RBA level was until the May rate cut.

“It is possible to write down a neutral rate that is, what about ‘four’. You would think we’re on the easy side of that now,” he said.

“There is a huge range around this number. I know you want numbers but I’m not going to answer this question.

“We’ll see how tight or loose policy is by judging the outcomes of the macroeconomy.”

NAB economists Taylor Nugent and Jessie Cameron said that while high inflation during the September quarter could be a one-off, there was a risk of no further interest rate cuts if supply constraints weren’t resolved, that could boost economic activity without adding to inflation.

“NAB expects the RBA to be firmly on hold before a final cut in May 2026, but risks are skewed to a 3.6 per cent terminal cash rate for the cycle,” they said.

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.”