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# RBA links poor productivity to inflation
- URL: https://www.benchmarkanalytics.com.au/rba-links-poor-productivity-to-inflation/
- Published: 2026-09-16T00:19:40.000Z
- Updated: 2026-09-16T00:19:40.000Z
- Description: Australia's productivity fell 0.2% in 2025–26. The RBA says weak productivity lowers the economy's growth speed limit, while businesses are also reporting the burden of continually changing regulation.
- Author: Nick Hossack
- Tags: Productivity, RBA, Sarah Hunter, Regulation, Inflation, Business

Australia's productivity problem is not just about living standards. It also affects inflation and interest rates.

RBA Assistant Governor Sarah Hunter made the connection particularly clearly this week. Weak productivity means the economy cannot grow as quickly before running into capacity constraints and generating inflation. Stronger productivity does the opposite: it allows more goods and services to be produced from the same resources.

That matters because Australia's recent productivity performance has been poor. Whole-economy labour productivity **fell 0.2% over 2025–26**, while average annual productivity growth over the past five years has been around **−0.5%**.

Hunter pointed to several possible explanations, including declining economic dynamism and less movement of workers between businesses.

But she also highlighted regulation.

The RBA's business liaison program, which talks directly with firms across the economy, hears **“all the time”** about the burden of regulation and particularly the difficulty created by regulation that continually changes. Businesses learn how to operate under one set of rules, only to have those rules change again.

That does not mean regulation caused Australia's productivity slowdown. Nor does it mean regulation is unnecessary.

But regulation has an economic cost. Management time spent understanding, implementing and then repeatedly adjusting to new requirements is time and capital unavailable for improving products, processes and technology.

The broader consequence is easily overlooked.

**Poor productivity reduces the speed limit of the Australian economy.** If businesses cannot produce more efficiently, economic growth runs into inflation sooner — leaving the RBA with less room to accommodate demand and ultimately increasing the pressure on interest rates.

Productivity policy and inflation policy are more closely connected than they sometimes appear.

Why productivity matters for inflation 

Australia's economic speed limit 

AUSTRALIAN PRODUCTIVITY

−0.2%

whole-economy growth, 2025–26

↓

**Weaker productive capacity** 

Less additional output from available labour and capital 

↓

**Capacity constraints arrive sooner** 

Demand runs into the economy's supply limits at a lower growth rate 

↓

**Greater inflation pressure** 

Less room for the economy to grow without generating inflation 

↓

**More pressure on interest rates** 

**RBA insight:** weaker productivity lowers the rate at which the economy can grow without creating inflation. Sarah Hunter also noted that businesses regularly raise regulation — particularly changing regulation — as an impediment to productivity.   
**Sources:** RBA; Productivity Commission.