RBA Deputy Governor Signals Cautious Approach on Rate Cuts Despite Economic Recovery
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The Reserve Bank of Australia is unlikely to rush into additional interest rate cuts despite three reductions already implemented, Deputy Governor Andrew Hauser told a UBS conference Monday, pointing to capacity pressures in the Australian economy that remain higher than in any recovery over the past 40 years.
Hauser, who serves as Deputy Chair of the RBA Monetary Policy Board and commenced his role as Deputy Governor in February 2024, acknowledged the bank faces a challenging balancing act between supporting growth and managing inflation as Australia navigates an economic recovery that began in September 2024.
“The estimate of capacity pressures is higher around this recovery than it has been in any other in the past 40 years,” Hauser said at the UBS Australian Macroeconomic Outlook event. “You might say, what the hell were we doing lowering rates in that situation?”
The Deputy Governor explained the bank’s pre-emptive rate cuts were designed to offset anticipated weakness in GDP growth, even as capacity utilization remained elevated. “We did see this weakness in GDP growth coming. We saw the output gap coming in towards zero in the way described, and we decided to start cutting rates preemptively in order to offset that future weakness in GDP growth,” he said.
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Hauser defended the RBA’s divergent strategy from other central banks, many of which had cut rates more aggressively. A year ago, Australia faced criticism for being “behind the curve” as GDP growth registered just 0.1 percent in June 2024—”not quite recessionary, but close”—while other central banks were already easing policy substantially.
The RBA’s caution proved prescient as several anticipated economic headwinds failed to materialize. The bank had expected tariffs announced by the U.S. administration to significantly impact Australia’s trading relationships, particularly with China, but “the worst fears haven’t proved correct,” Hauser said.
“We haven’t seen material effects on global trade flow so far from the tariffs, pretty extraordinary in some ways,” he noted. Australia has also avoided the confidence shock in consumer and business sentiment that the RBA had anticipated, with employment performance proving “particularly strong” compared to other developed nations.
Looking ahead, Hauser indicated the market is pricing in approximately 20 basis points of further cuts—”not quite one” full cut—with projections suggesting rates will trough at slightly higher levels than previously expected. “On the basis of that one cut profile in the market path, we predicted that inflation would slightly overshoot the midpoint of the target,” he said.
The Deputy Governor emphasized significant uncertainties around any forecast, noting “enormous trends that are going on in the global and domestic economy.” He quoted his former boss, saying “the one thing you know about that forecast is that it’s wrong.”
Hauser also addressed Australia’s economic outlook in the context of changing global investment patterns, suggesting the country could benefit from a reorientation of capital flows. He described “an enormous untapped potential in Australia for these investment flows, whether it comes domestically or internationally, for taking these raw assets of the economy and turning them into productive potential.”
The optimistic scenario would see increased investment pushing supply up and inflation down, “actually allow us to have somewhat easier rates over time,” Hauser said. However, he warned against an alternative scenario resembling past property bubbles, where “an excessive amount of money is ploughed into the existing asset stock, probably mainly property, pushing asset prices up above where they justify to be.”
On quantitative tightening, Hauser confirmed the RBA’s Monetary Policy Board recently reaffirmed its strategy of allowing bond holdings to run off passively rather than actively selling assets, contrasting with the Bank of England’s approach where he previously served as Executive Director for Markets. “I’m not sure there’s much evidence that the RBA’s runoff program is harming the formation of medium and long-term interest rates in Australia,” he said.
Underlying inflation has returned to the RBA’s target range, Hauser noted, though he emphasized the bank remains vigilant about capacity pressures as the recovery continues. The Deputy Governor’s comments suggest any further rate cuts will be carefully calibrated to balance growth support against inflation risks in what he characterized as an unusually high-pressure recovery environment.
The RBA’s measured approach stands in contrast to more aggressive easing cycles in other developed economies, reflecting Australia’s relatively stronger employment performance and the unique characteristics of its current economic recovery.
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