Jawboning and Productivity

The Board kept interest rates at 4.35%. It was unanimous.

Inflation may have peaked, but the RBA still sees tail risks for inflation on the upside. So what do you do when you don’t need or want to raise rates but you want consumers to think you remain tough on inflation? You give a stern warning that an interest rate increase could be just around the corner.

Bullock also pointed to Australia’s recent low productivity growth, as she has for over a year. However, the remarks seemed stronger this time around.

What the RBA’s statement said

“While the impact of the Middle East conflict on inflation has so far been less than expected, headline inflation is still too high. Trimmed mean inflation also remains elevated and is little changed from the March quarter.”

“Global oil supply will take time to recover, maintaining upward pressure on global energy prices and inflation, in which case domestic inflationary pressures could be higher than expected.”

“Some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so.”

“With monetary policy judged to be somewhat restrictive, the Board decided to leave the cash rate target unchanged while it assesses how the economy is evolving.”

“In Australia, historically weak productivity growth continues to constrain potential growth.”

https://www.rba.gov.au/media-releases/2026/mr-26-19.html

What the governor said at the media conference

“The domestic economy continues to operate above capacity and the labour market remains a little tight.”

“The Board is determined to ensure that expectations of higher inflation do not become embedded in price and wage-setting decisions.”

“The Board also remains concerned about the continued weakness in productivity growth. Productivity outcomes have been weak for some time, and continued weakness will constrain the economy’s ability to grow without generation high inflation.”

“We expect a period of subdued growth in the economy is required to bring inflation down sustainably.”

“But we have raised rates three times,and we will go again if we need to.. And I personally think that it is quite possible that we will need to go, but we will wait to see what the data will tell us.”

Inflation is coming down

Headline inflation fell from 4.6% in March to 3.8% in June. The RBA now believes that headline inflation has peaked (see the solid line in the chart below). The RBA’s three rate rises are doing their work. Trimmed-mean inflation was flat in June.