RBA Faces Tight Balancing Act as Australia’s Economic Recovery Limits Policy Easing

Australia’s monetary policy is facing a unique challenge as the economy continues to recover with demand still exceeding potential output, leaving little room for the Reserve Bank of Australia (RBA) to loosen policy further. In a speech at a UBS conference in Sydney, RBA Deputy Governor Andrew Hauser said that demand was “slightly above potential output” when GDP growth began to accelerate last year — marking the tightest recovery since the early 1980s. This situation, he noted, limits how much the economy can expand without fueling inflation.

Hauser emphasized that while strong demand signals robust business activity and job creation, it also complicates policy decisions. “That can still be consistent with bringing inflation back to target over the medium term,” he said. “But achieving that goal will require policy to be restrictive enough to keep shrinking the gap over that period.” The RBA maintained its cash rate at 3.6% last week amid rising inflation, resilient consumer spending, and a rebounding housing market, prompting policymakers to pause further easing after three consecutive cuts earlier this year.

The central bank now expects inflation to remain above its 2–3% target until at least mid-2026, citing persistent capacity constraints in the economy. Economists from Commonwealth Bank of Australia and HSBC have urged the RBA to end its current easing cycle, while financial markets anticipate only one more rate cut by mid-next year. Hauser also stressed the need to boost productivity and investment to expand supply and avoid inflationary pressures. “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,” he concluded.