Key Highlights

  • Governor Bullock said low productivity growth means the economy cannot grow rapidly without adding to inflation pressure.
  • Household spending growth is moderating only gradually, business investment has picked up and the labour market appears slightly tighter than judged.
  • The pick-up in business investment adds to demand today, which is part of why the Bank still sees domestic capacity pressures.

Governor Michele Bullock has told senators that low productivity growth caps how quickly Australia's economy can expand before it starts adding to inflation pressure.

Every economy has a speed limit. Drive above it for long enough and the result is not more prosperity but higher prices, as businesses and households compete for workers, materials and services that simply are not available in sufficient quantity. In Australia's case, the Reserve Bank of Australia (RBA) believes that limit is currently set low, and the reason is productivity.

In her Opening Statement to the Senate Economics Legislation Committee on 28 October 2026, Governor Michele Bullock said low productivity growth means the economy cannot grow rapidly without adding to inflation pressure. It was a brief line in a wide-ranging statement, but it helps explain much of the RBA's thinking as the Monetary Policy Board prepares to meet on 2–3 November.

What productivity has to do with prices

Productivity is, in simple terms, the amount of output produced for each hour worked or each unit of capital used. When productivity rises steadily, the economy can produce more goods and services without needing proportionally more workers or equipment. That extra supply makes room for faster growth in incomes and spending without pushing up prices.

When productivity growth is low, the arithmetic changes. Growth in output then depends much more heavily on adding workers and capital. If demand for goods and services grows faster than that capacity, the gap tends to show up as inflation.

That is why the RBA links productivity so closely to its inflation mandate. The Governor told senators the RBA's aim is to return inflation to the 2–3 per cent target range, with the midpoint as the reference, while retaining some flexibility on timing to balance full employment. A low speed limit makes that balancing act harder.

Demand running ahead of supply

The RBA's recent communication repeatedly returns to the idea that demand is outpacing what the economy can sustainably supply.

At her media conference on 29 September 2026, the Governor said: "Inflation is too high and has been driven by domestic capacity pressures." Before senators on 28 October she repeated the theme: "we still see inflation arising from domestic capacity pressures."

Assistant Governor (Economic) Sarah Hunter made the same point in plainer terms during her 60 Minutes interview, broadcast on 25 October 2026. She identified two challenges: an overseas oil shock, and excess domestic demand relative to sustainable supply. The first is largely outside Australia's control. The second is where the speed limit comes in.

Several pieces of evidence the Governor pointed to suggest demand has stayed firm:

  • Household spending growth has been moderating only gradually.
  • Business investment has picked up, mainly in data centres and renewable energy.
  • The labour market appears slightly tighter than previously judged, even though the unemployment rate has recently risen a little more than expected.
  • In its 29 September decision statement, the Board noted: growth in output had slowed but, at the margin, exceeded expectations in the June quarter.

Put together with low productivity, those signals point to an economy operating close to, or above, its sustainable pace.

The September 2026 Consumer Price Index, released by the Australian Bureau of Statistics (ABS) on 28 October, gives a snapshot of the outcome. Headline CPI rose 4.3% over the 12 months to September, up from 4.0% in August. The trimmed mean, the RBA's preferred underlying measure, rose to 3.6%, up from a revised 3.5%. CPI excluding volatile items such as fruit, vegetables and automotive fuel was 3.7%.

Some of the headline rise reflects factors far removed from productivity. Automotive fuel was up 23.6% over the year, driven by higher world oil prices, and electricity rose 12.8%, mainly because Commonwealth electricity rebates ended. But underlying measures above 3.5% and services inflation of 4.1% suggest broader pressure that is consistent with demand pressing against limited capacity.

The investment question

There is a potential twist in the story. The pick-up in business investment that the Governor described, concentrated in data centres and renewable energy, adds to demand today. Building facilities, installing equipment and hiring workers to do so all compete for resources in an economy with little spare capacity.

Over time, however, investment can be one of the ways an economy lifts its productive capacity. The RBA's October 2026 Financial Stability Review noted: "Optimism around AI is boosting asset prices and has considerable potential to improve productivity and resilience." That is a statement about potential, not a forecast, and the RBA has not put a number on any productivity payoff in the facts available today.

The near-term tension is clear, though. Investment that may eventually raise the speed limit is, for now, part of the demand that is pressing against it.

Why the speed limit shapes interest rate decisions

Monetary policy cannot directly raise productivity. What it can do is influence demand. By raising borrowing costs, the RBA aims to slow spending and investment towards a pace the economy can sustain without generating persistent inflation.

The Board has lifted the cash rate target four times in 2026, a cumulative 100 basis points, taking it to 4.60 per cent effective 30 September. In its September statement the Board said "a further tightening in financial conditions is warranted" and flagged "increasing the cash rate target further if needed".

Officials have also stressed they are not seeking a collapse in activity. Assistant Governor Hunter said on 60 Minutes: "We're not trying to achieve a sharp stop or a really big downturn or anything like that." The goal is to bring growth back within the speed limit, not to bring it to a halt.

The Board's next decision, together with a fresh Statement on Monetary Policy containing updated forecasts, is due at 2.30 pm (AEDT) on 3 November. That decision has not yet been made, and neither the Governor nor the Assistant Governor has signalled its outcome.

The bottom line

The RBA's concern is not growth as such, but growth that outruns the economy's capacity. With productivity growth low, the Governor has told senators, the economy cannot grow rapidly without adding to inflation pressure. That helps explain why the central bank continues to describe inflation as partly driven by domestic capacity pressures, even as housing prices fall in most capital cities and the unemployment rate edges higher. Until productivity improves, the speed limit stays low, and the Board's assessment of how close the economy is to it will remain central to its decisions.