On August 12, 2025, the Reserve Bank of Australia (RBA) reduced its cash rate by a quarter percentage point to 3.6%. This marks the third interest rate adjustment of the year, bringing the rate to its lowest point since April 2023. RBA Governor Michele Bullock indicated that future rate adjustments would depend on evolving economic forecasts and conditions.
The RBA's statement highlighted significant concerns about Australia's productivity levels, leading to a downward revision of its forecast for future productivity growth from 1% per annum to 0.7%. This adjustment implies a more constrained potential for wage increases without fueling inflation than previously estimated. Australia experienced its weakest productivity growth in 60 years between 2010 and 2020, with the Productivity Commission identifying reduced multifactor productivity as a key factor, stemming from inefficiencies in combining labor and capital. Policy responses during the COVID-19 pandemic, such as JobKeeper, may have also inadvertently hindered the reallocation of labor and capital to more productive sectors.
Treasurer Jim Chalmers acknowledged the severity of the productivity challenge, describing it as central to the government's economic strategy. However, Governor Bullock stressed that while the RBA influences interest rates, addressing the productivity deficit is primarily the government's responsibility. The RBA's revised productivity forecasts have implications for economic growth, with a more gradual pick-up in GDP projected for 2025. This recalibration also affects wage growth expectations, with average earnings per hour, adjusted for inflation, now forecast to grow at a slower pace.
The government is actively pursuing solutions through initiatives like the Productivity Commission's ongoing inquiries into workforce adaptability, digital innovation, and market dynamism. Reports from these inquiries are expected in late 2025, aiming to identify priority reform areas to reverse the current trend of low productivity growth, which has historically been the main driver of rising per capita incomes and living standards.