RBA Signals Limits To Australian Growth Flexibility

Australia’s economy continues to demonstrate resilience but with structural constraints that limit near-term policy flexibility. The Reserve Bank of Australia (RBA) has signaled that aggregate capacity utilization remains highly elevated, with output gaps narrowing close to zero despite a rebound in underlying inflation. This signals that the economy is running close to its maximum sustainable non-inflationary speed.

Recent macroeconomic data highlights the tight conditions. The seasonally adjusted unemployment rate for September 2025 rose to 4.5%, yet measures of labour underutilisation remain at low rates, suggesting persistent tightness. Underlying (trimmed mean) inflation increased to 3.0% year-on-year in the September 2025 quarter, placing it at the top of the RBA’s 2.0%–3.0% target band.

This acceleration, coupled with still high growth in unit labour costs, suggests that the RBA's capacity to ease policy without reigniting price pressures remains significantly constrained. Consumption has been surprisingly robust, underpinned by resilient household balance sheets that saw net wealth rise 2.7% in the June quarter of 2025 (latest ABS data), largely driven by residential real estate and superannuation. This robust household demand, affecting ASX-listed household exposure (XJO), fuels the domestic pressure cooker.

Mechanically, high capacity utilization is transmitting into wage-price feedback loops, where the tight labour market maintains bargaining power, accelerating cost pressures for firms that are already struggling with weak productivity growth. Business investment growth, while positive, remains below trend at 1.3% for the 2024–25 financial year, reflecting cautious corporate sentiment amid global trade frictions, while private credit expansion decelerates slightly, estimated near 5.0% year-on-year. Sectoral impacts vary: construction and logistics remain capacity-bound and input-cost sensitive, while energy and mining investment moderate under recent global commodity cycles.

The economic signal embedded in the RBA’s November 2025 statement is a firm reaffirmation of policy credibility: maintaining anti-inflationary vigilance by holding the cash rate at 3.60% while managing growth expectations. Financial markets have reacted by reassessing the neutral rate. The Australian 10-year government bond yield (AU10Y) edged higher to approximately 4.41% (as of November 10, 2025), reflecting expectations of elevated interest rates for longer and increased duration risk. Equity markets showed modest rotation, with ASX 200 financials (XJF) marginally outperforming defensives as rate expectations stabilize following the latest RBA hold decision.

Geopolitically, Australia’s significant trade exposure to China and the US continues to shape investment sentiment, particularly in metals, LNG, and agricultural exports. Forward-looking, the macro outlook suggests that bringing underlying inflation sustainably back into the 2.5% midpoint of the target band will be a protracted process over the next two quarters, contingent heavily on genuine labour market cooling and global commodity price stabilization.

Investors and policymakers should monitor employment data, capacity utilization surveys, and the AU10Y spreads as key indicators of monetary policy transmission and sectoral stress. Structural reforms in labour mobility and digital infrastructure could modulate these capacity pressures over a 12–24 month horizon, influencing capital allocation and corporate credit spreads.