Economics update | 5 August 2022

04 Aug 2022

Reserve Bank continues to tighten monetary policy

The Reserve Bank Board continued its process of normalising monetary policy and controlling acute inflationary pressure, raising the cash rate by a further 50 basis points to 1.85% at its 2 August meeting. This is the fourth increase in as many months.

It follows last week’s release of consumer price data showing headline inflation rising to 6.1%. The inflationary pressure will remain for some time, with the RBA forecasting inflation to reach 7.75% by the end of the year, before settling back to 4% by the end of 2023, then 3% in 2024. The Reserve Bank is expected to continue to tighten monetary policy over the remainder of the year to dampen this inflationary pressure.

The RBA is clearly expecting this tightening of monetary policy to have an impact next year. It has markedly revised down its GDP forecasts to 3.25% in December 2022, then 1.75% in 2023 and 2024. This compares with the forecasts in its May 2022 Statement on Monetary Policy, where it was forecasting GDP to be 4.25% in December 2022, then 3% by June 2023 and 2% by June 2024.

Productivity Commission – Key to Prosperity Interim Report

Earlier this week, the Productivity Commission released the interim report of its 5-yearly review of productivity performance, titled The Key to Prosperity. ACCI participated in the initial round of consultations earlier this year and forwarded a submission.

The report shows productivity has slowed in the past two decades and is now at its lowest rate in 60 years. The report identifies the main challenges to be increasing the productivity of the service sector, which has grown from 60% of the economy in 1960 to 90% of the economy today – a function of our rising prosperity. Historically, productivity growth has been harder to achieve in the service sector than traditional goods sectors such as agriculture, manufacturing and mining, where capital has replaced much labour and new technology has driven large gains in overall productivity.

The Commission has identified four areas of policy focus that best reflect the challenges and opportunities Australia faces. The key enablers of focus are:

innovation and diffusion of new processes and ideas
data, digital technology and cyber security
a productivity-friendly business environment
a skilled and educated workforce.

It intends to release a series of interim reports on each of the productivity ‘enablers’ and will undertake public consultation on these over the remainder of the year.

The interim report and detail on future reports can be found on the Productivity Commission website.

Small business tax decisions

This week the government also introduced a treasury laws amendment bill that will increase the powers of the Administrative Affairs Tribunal (AAT) to direct the Tax Office’s actions in disputes over small business debt recovery, such as commencing winding up proceedings or issuing garnishee notices until, at least, the underlying dispute is resolved. This same legislation was introduced in the last weeks of the former government.

Economics update | 5 August 2022

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Economics update | 5 August 2022

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