On August 6, the Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points to 3.6%, in line with market expectations. The decision was unanimously approved, marking the restart of the rate-cut cycle after last month’s unexpected pause. This is the third rate cut this year, bringing the total reduction to 75 basis points. While the move was expected, the set of economic forecasts released alongside the decision cast a shadow over Australia’s growth outlook.
Source: RBA
Productivity Growth Forecast Slashed
In its latest quarterly Monetary Policy Statement, the RBA downgraded its medium-term productivity growth forecast from 1% to 0.7%—a 30% cut. This is the first downgrade of this key economic indicator since the COVID pandemic began. The bank even admitted that this new forecast might still be too optimistic.
“Productivity growth is the core engine for long-term real wage growth,” the RBA stressed in its update. “Persistently weak labour productivity will directly weigh on income per capita and wage growth.” Data shows that Australia’s productivity growth has been near zero since 2016—a puzzle economists have been calling the “productivity paradox.”
Source: AFR
The RBA pointed to several structural reasons for the slump: declining business dynamism and competition, slower diffusion of new technologies, and weaker growth in capital investment per worker. Notably, the report highlighted that the recent hiring boom in government-funded sectors like healthcare and education has actually dragged on overall productivity growth.
Growth Ceiling Lowered to 2%
With this gloomy productivity outlook, the RBA also cut its estimate for Australia’s sustainable GDP growth rate from 2.3% to 2%. In other words, any growth above 2% could hit supply constraints and trigger inflationary pressure.
“The slowdown in productivity is now fully visible,” the RBA noted. “It’s showing up in sluggish wage growth, flat household incomes, and weak consumer spending.” The central bank said the economy is adapting to a “new normal” of slower supply-side growth.
The timing of this downbeat forecast is striking—it comes just before Treasurer Jim Chalmers’ three-day Economic Reform Summit, where 24 business and union leaders will meet behind closed doors to discuss policies to boost productivity. Chalmers responded by saying: “This isn’t a short-term problem. It’s a long-term, global structural challenge, and it will be at the core of our economic policy agenda.”
Policy Outlook Clouded with Uncertainty
While June-quarter CPI showed underlying inflation had eased to 2.7%—the lowest in three and a half years—giving the RBA room to cut rates, the sharp downgrade in productivity forecasts raises doubts about how effective monetary policy can be.
In its statement, the Board stressed: “There is significant uncertainty about the balance between demand and potential supply. We remain alert and will closely monitor global developments, domestic demand, inflation, and the labour market.”
Market analysts are split on the RBA’s next move. Most expect another 25-basis-point cut before Christmas, taking the cash rate to 3.35%, but believe easing will slow after that. Adam Bowe, Head of Portfolio Management at PIMCO Australia, said: “Yes, the RBA has started an easing cycle, but policy is still tight. Given the structural challenges to growth, there’s room for more easing.”
The “neutral rate” remains hotly debated, with most estimates around 3%, but in today’s uncertain environment, any forecast comes with a big margin of error.
Price Stability and Full Employment Still the Priority
With underlying inflation now close to the midpoint of the 2–3% target range and labour market conditions easing slightly as expected, the Board judged that further policy easing was appropriate. This latest move brings the total rate cuts this year to 75 basis points.
Still, given the uncertainty over supply and demand, the Board remains cautious. It emphasized that current policy settings offer enough flexibility to respond decisively if global events materially affect Australia’s economy and inflation. The RBA reaffirmed its dual mandate of price stability and full employment, promising to take whatever action is needed to meet those goals.
At the press conference, Governor Michele Bullock noted that the Bank’s forecasts assume more rate cuts ahead. She said if cuts were paused, targets would be harder to achieve—leaving the door open to back-to-back cuts. After her comments hinted at more easing, the ASX 200 $S&P/ASX 200(XJO.AU)$ hit another record high. Markets now expect the cash rate to settle between 2% and 3% by the end of 2026.
Source: TradingView
Invesight Viewpoint
The RBA has cut rates for the third time this year, down to 3.6%, with a total of 75 basis points in reductions so far—formally starting an easing cycle. The unanimous decision reflects progress on inflation, which has eased to 2.7%, but the Bank’s downgrade of productivity growth (to 0.7%) and potential GDP growth (to 2%) underscores deep structural challenges. The RBA remains cautious, watching both domestic and global developments, and markets expect further cuts. However, weak productivity remains the biggest bottleneck to sustainable growth, requiring serious structural reforms to address.
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