RBA likely to delay interest rate cuts due to Australia’s weak productivity growth: HSBC

Australia’s weak productivity growth will likely delay interest rate cuts despite excitement in the market, says one economist.

With the Reserve Bank of Australia meeting for the first time for 2024 on Monday ahead of its decision on Tuesday, HSBC chief economist Paul Bloxham said rate cuts for Australia were quite some time away.

He said this was largely due to the lagging productivity growth, which has slumped in recent years and has come under increased scrutiny as nominal wages have increased, but productivity growth as measured has not kept pace.

The RBA has particularly urged a lift to help keep inflation in check.

“Weak productivity growth has occurred at the same time that annual wages growth has picked up, from running at around 2 per cent pre-pandemic to 4 per cent recently,” Mr Bloxham said.

He said the exceptionally tight labour market at the end of the pandemic and a lack of skills in the economy had weighed on productivity.

“However, labour markets have been tight across the developed world. Increased work from home has also been a key feature in lots of locations,” he said.

“And yet, Australia’s productivity performance is distinctly worse than elsewhere.”

“Without a lift in productivity, rate cuts may be a distant prospect.”

The national unemployment rate held at 3.9 per cent in December, continuing a near 50-year low that has spanned for almost two years, amid a strong population growth.

Major banks ANZ and CBA do not expect rate cuts until towards the end of the year, in November and September, respectively.

AMP is expecting a rate cut in June.

Financial markets assess the chance of a rate cut this week as 5 per cent, and 95 per cent expect no change. The US Federal Reserve has talked down expectations of a rate cut as early as next month.

Mr Bloxham also said while inflation was falling, it was still well above the RBA’s 2 to 3 per cent target band.

“The key factors supporting elevated Australian core inflation are the domestic components, particularly rents, utilities and insurance, all of which may prove to be sticky,” he said.

“More broadly, services inflation is still running strongly, although it has eased from its peak.”

Interest rates were last increased to 4.35 per cent in November last year year after several months on hold.

But with inflation now at a two-year low of 4.1 per cent, many economists are tipping rates to stay on hold at the RBA’s widely-anticipated first meeting on the year.