Productivity growth is virtually zero now, just as it was in March 2024. One difference is that the RBA is probably now more resigned to low productivity growth, despite still ‘projecting’ 0.7% growth in its forecasts. In 2024, it more genuinely expected productivity growth to bounce back after the disruption of the pandemic period.
While these observable data look pretty similar to early 2024, the RBA’s estimates of the NAIRU and the neutral rate, two key variables that are inferred rather than observed, have increased.
The NAIRU, or ‘full employment’, is the unemployment rate that puts neither upward nor downward pressure on inflation. In 2024, the RBA thought it was in the range of 4 to 4½%, whereas more recently it has indicated that it is likely closer to 4¾%. That means the increase in unemployment has not slowed inflation as much as you might have thought at face value.
The neutral rate is the level of the cash rate that is neither restrictive nor expansionary. The RBA has stated that it estimates the neutral rate has increased since the pandemic.
The increases in the NAIRU and the neutral rate both imply that a higher cash rate is needed for any given set of economic conditions.
The increase in inflation in the second half of 2025 implies that policy before then was not tight enough, specifically that the easing in 2025 was too early or too fast. While that appears obvious with hindsight it was not necessarily the wrong decision at the time. Based on the slowing in inflation and wages growth, easier monetary policy seemed justified in 2025. But, we now know that demand was still stronger than supply, so we can better judge that policy was not as tight as the RBA thought.
