RBA rate hike reflects sluggish productivity, economists say

The RBA’s decision to hike interest rates to 3.85 per cent on Tuesday (3 February) reflects stubborn price pressures and capacity constraints, industry economists have said.

EY chief economist Cherelle Murphy said the decision reflected the board’s concerns with the economy’s supply capacity. The RBA has previously flagged that productivity growth would be necessary to sustain economic growth without spurring additional inflation.

“The Reserve Bank also indicated it is now uncertain if monetary policy is restrictive and that if demand continues to strengthen and supply capacity remains limited, it is ‘likely to add further to capacity pressures.’ In other words, the economy is unable to grow much faster without overheating,” Murphy noted.

She added that EY foresaw further tightening, given the strength of the labour market and ongoing public sector spending.

“A strong labour market, elevated government spending and capacity constraints, means further tightening in monetary policy seems likely this year to combat rising inflation,” Murphy said.

“It is critical for the Reserve Bank to get inflation sustainably to the mid-point of the target band to ensure accelerating price rises don’t become entrenched and to protect real incomes and living standards.”

Deloitte Access Economics partner Stephen Smith said the pivot to a tightening cycle amid lacklustre economic growth was an “indictment” of Australia’s productivity, and warned that reform would be necessary to spur growth without inflation.

“The fact that an economy growing at 2.3 per cent breaks out in inflation sweats points to a more fundamental problem in our economy – our poor capacity to produce goods and services and our low run rate. That we are here is an indictment on the piecemeal and lacklustre nature of reform over the last three decades,” Smith said.

“The focus from here should be on lifting the capacity of the economy and its run rate though a strategic supply side reform effort. The upcoming Budget should be all about incentivising investment, especially by the private sector, to drive productivity.”

BDO chief economist Anders Magnusson said the RBA’s Tuesday decision signalled the board was concerned about ongoing inflation dynamics. Trimmed mean inflation has remained outside of the RBA’s 2-3 per cent target bands since September 2025, reaching 3.3 per cent over the 12 months to December 2025.

“The RBA does not shift into a tightening cycle lightly. Today’s decision signals that the Bank sees concerning long-term inflation dynamics emerging, rather than just a temporary overshoot,” Magnusson said.

“This move marks a meaningful shift in the monetary policy cycle, suggesting further rises are coming, and the unanimous decision shows strong conviction by the board.”

RSM economist Devika Shivadekar added that the RBA board had assessed that underlying momentum in demand and wages was likely to keep inflation above target over the medium term. However, RSM did not foresee further rate hikes unless the data changed materially.

"Our base case remains a prolonged period on hold unless data warrants otherwise,” Shivadekar said.

"The latest RBA forecasts show upward revisions to both growth and inflation, reflecting the Bank's view that inflation will take longer to return to target amid ongoing excess demand.”