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Governor Michele Bullock says productivity is "doing nothing" and that "the supply side of the economy has to grow", a reminder that interest rates can only manage demand, not expand the economy's capacity.

Most of the attention after the Reserve Bank of Australia's (RBA) September decision went to the rate rise itself: a 25 basis point increase that took the cash rate target to 4.60 per cent on 29 September. But one of the more structural remarks at the media conference that followed deserves a closer look.

At that media conference, Governor Michele Bullock said productivity is "doing nothing" and that "the supply side of the economy has to grow."

The comment goes to a basic tension in the RBA's job. The central bank's main tool, the cash rate, works mainly by influencing demand: how much households and businesses spend and borrow. It cannot directly increase how much the economy is able to produce. That capacity, sometimes described as the economy's speed limit, depends on things such as productivity and investment.

Demand running ahead of capacity

The RBA's recent statements describe an economy in which demand has been pressing against the limits of supply.

In her opening statement to the House of Representatives Standing Committee on Economics on 18 September, Ms Bullock said: "A period of subdued growth of aggregate demand is needed to reduce capacity pressures and bring inflation down sustainably."

The phrase "capacity pressures" is the key. When spending grows faster than the economy's ability to supply goods, services and workers, prices tend to rise. The RBA's response has been to lift rates to slow demand growth.

Other signals point the same way. The Board's 29 September statement said recent data suggest growth and inflation in Australia have been higher than expected. On the labour market, the Governor said at the media conference: "The unemployment rate is still quite low historically, and we still think the labour market is a little bit tight."

Meanwhile, inflation remains above the 2–3 per cent target range. Headline inflation from the August monthly CPI indicator was 4.0 per cent, according to the RBA homepage, while Ms Bullock said underlying (trimmed mean) inflation has been about 3.5 per cent for the past six months.

Why the speed limit matters

If productivity is flat, the economy's capacity grows mainly through adding more workers and more capital, rather than getting more out of each hour worked. That leaves less room for demand to expand before it starts pushing up prices.

This is the logic behind the Governor's call for the supply side to grow. A faster-growing supply side would, in principle, allow the economy to absorb stronger demand with less inflationary pressure. Without it, the burden of keeping inflation in check falls more heavily on monetary policy and, by extension, on borrowers.

The August 2026 Statement on Monetary Policy gives a sense of how slow the near-term growth outlook is. It forecast GDP growth of 1.4 per cent over the year to December 2026, a subdued pace consistent with the RBA's view that demand needs to cool for a while.

The RBA has also said it does not expect a slump. Asked about recession on 29 September, Ms Bullock said: "That is not our central base case at this moment."

Investment: a possible source of new capacity

There is one area where the RBA sees strong momentum. The Board's 29 September statement noted: "Growth in business investment and debt is strong."

Investment is one of the ways an economy can lift its supply capacity over time, by adding new equipment, technology and infrastructure. Part of the current investment story is linked to artificial intelligence.

Deputy Governor Andrew Hauser described the AI wave in an ABC 7.30 interview on 8 September. To generate the benefits, he said, "you first have to put in place the kit", calling it a "fairly conventional investment boom".

That framing highlights a timing issue. The building phase of an investment boom adds to demand straight away, while any productivity benefits arrive later, if at all. In the meantime, the RBA has flagged price effects. The Board said: "AI-related demand is driving rapid growth in global prices for technology-related goods." Ms Bullock added at the media conference: "The global AI investment boom has driven significant price rises for some inputs within the AI supply chain."

The Financial Stability Review released on 1 October also cautioned that AI-related equity prices "reflect very strong expectations regarding future adoption and productivity rates, revenue growth and profitability". In other words, share prices already reflect high hopes for the productivity payoff.

Supply shocks that work the other way

Not every supply-side development is helping. Several of the pressures the RBA has identified reduce or disrupt supply rather than expand it.

  • Energy: "Global oil supply disruptions are maintaining upward pressure on global and domestic energy prices and inflation," the Board said on 29 September.
  • Pass-through: "Higher fuel prices have partially been passed through to prices of other goods and services," according to the same statement.
  • Weather: on 18 September, Ms Bullock said: "The Middle East conflict, the AI boom and extreme weather events are contributing to upward pressure on a range of energy, agricultural and technology-related prices."

These are the kinds of shocks a central bank cannot fix with interest rates. What it can do, the RBA argues, is stop them feeding into longer-lasting inflation. "It's critical that we stop expectations for high inflation from becoming embedded in price-setting decisions," the Governor said.

The bottom line

Governor Bullock's remark that "the supply side of the economy has to grow" is a reminder of the limits of monetary policy. The RBA can slow demand, as it did again in September, but it cannot directly raise the economy's speed limit. With productivity described as "doing nothing", business investment strong and the AI wave described as a conventional investment boom, the question of whether supply capacity expands will shape how much work interest rates have to do. What to watch: the November Statement on Monetary Policy on 3 November, which will carry the RBA's updated growth and inflation forecasts.