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Reserve Bank reveals why lack of business investment is holding back economy, threatening further rate cuts

Further cuts to interest rates could be held back, as the Reserve Bank’s deputy governor flags Australia’s economy is being held back by businesses failing to invest.

The Reserve Bank has warned a lack of investment by business is holding back the Australian economy, further delaying more rate cuts.

“Real business investment has been flat over the past 18 months and capital expenditure intentions suggest little or no growth over the 2025/26 financial year,” RBA deputy governor Andrew Hauser said in a speech to the UBS Australasia Conference in Sydney on Monday.

“And private investment, which also includes housing investment, remains well below its peak of the mining boom as a share of GDP.”

He indicated that lack of investment could have an impact on rate cuts, which the RBA monetary police board left on hold at 3.6 per cent last week after inflation spiked in September.

“There are still worlds you could imagine where rates are cut,” Mr Hauser told the conference following the speech.

“I don’t think you have to be mad, or a fanatic, to think that future rate cuts could be coming.

“More plausibly, perhaps, at the moment, you might worry about how much remaining room there is.”

Mr Hauser said if Australia’s economy was to take the leap, businesses needed to expand productive capacity and make further business investments.

Currently the RBA forecasts demand is slightly higher than the country’s potential output, meaning the central bank might need to leave interest rates higher to shrink this gap over a period of time.

Even though the board held interest rates in November due to higher inflation, Mr Hauser pointed out a lack of spare capacity in the economy was actually good news but came with problems.

“It means busier companies and more jobs,” he says.

“Achieving sustainable full employment is a key part of the Monetary Policy Board’s mandate but it does pose challenges for policy settings.

“Those challenges were highlighted by the latest data, which showed underlying inflation rising to 3 per cent in the year to September – 0.5 percentage point higher than expected in our August forecasts – at the same time as unemployment also rose to 4.5 per cent in September.”

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• This topic was modified 1 week, 3 days ago by  Alexender Noah.

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