Narrow path-dependence
RBA minutes and Governor’s Anika speech clarify forward view. But the near-term forward path again seems to come down to small differences in outcomes for trimmed mean inflation versus expectations.
RBA Monetary Policy Board (MPB) minutes and Governor’s Anika Foundation speech this week provide additional colour on the MPB’s split decision to keep rates on hold. The minutes gave the views of both members who voted to hold and members who voted to cut a good airing.
The RBA’s view of productivity and supply-side issues is evolving and likely to continue to do so, with more internal work going on ahead of the August meeting and Statement on Monetary Policy. There are some important nuances and intellectual traps in this debate, though. Path-dependence can become a factor: tight labour markets might draw more workers in, making them more integrated into the labour market and boosting labour supply in the longer run.
Since no single MPB member can front-run the decision of the whole Board, future inter-meeting communication is unlikely to endorse or push back against market pricing. This implies that markets will be surprised more often than in countries like the United States, where the central bank puts more weight on avoiding surprising the market. This approach should not, however, rule out making the RBA’s own interpretation of the data or its analytical models clearer when misconceptions arise.
This week’s minutes and Anika Foundation speech provided plenty to consider about how the RBA is seeing the economy. Inflation has come down significantly, which was welcomed. Unlike many other economies, this has not been at the expense of significantly higher unemployment. (For the technically minded, this means the ‘sacrifice ratio’ has been low.) While the Governor stopped short of claiming vindication, the contrast with other peer economics such as Canada and New Zealand did highlight the role of the RBA Board’s strategy to raise the policy rate by a bit less than in those other countries. Still, the MPB clearly remains nervous about inflation and some members want to see actual data to support their expectation that it is still declining towards 2½%, the midpoint of the RBA’s 2–3% target range. For this reason, we cannot lock in the cash rate cut in August just yet. We do, however, think it is the most likely outcome, especially if the quarterly inflation numbers come in as we expect (PDF 701KB).
Supply, productivity and path-dependence: the plot thickens
Unsurprisingly given the government’s upcoming roundtable, productivity received plenty of attention in the minutes, speech and Q&A. The minutes acknowledged that the expansion of the non-market sector and declining mining sector output had contributed to developments recently. The Governor noted that the staff are doing more work on productivity ahead of the August SMP. It is not clear which way this will go. We know that much of Australia’s living standards challenge stems from the fact that the free kick from rising minerals prices is no longer occurring. This would be true even if productivity growth were robust: when one factor is no longer boosting living standards, something else must adjust to make up the difference.
Concerns about productivity relate to the supply side of the economy. The Governor’s speech acknowledged that much of the surge in inflation following the pandemic stemmed from supply shocks. This is, incidentally, quite an evolution from the RBA’s assessment in late 2023 that inflation was becoming ‘increasingly homegrown and demand driven’. While these supply shocks were more drawn out than some observers initially expected, they did eventually subside. Monetary policy can mostly look through this kind of inflation as long as inflation expectations remain anchored.
But strong demand was also a factor. This was especially an issue in the United States, where fiscal policy remained very expansionary even after the disruptions of the pandemic had passed. The issue was less pronounced in Australia, but the exceptional stimulus during the pandemic and the surge in population when the borders reopened did play a role. (The RBA also today released some interesting findings on the latter.) The differing experiences of economies stemming from different fiscal responses highlights why it is so important that the methods central banks use to disentangle supply and demand shocks are appropriate, and do not fall foul of the ‘other fruit problem’.
More broadly, in the speech Q&A, the Governor acknowledged that weak productivity and weak supply did not necessarily imply anything for demand and so monetary policy. While that clears up any misconceptions that weak productivity growth is necessarily a reason to keep monetary policy tight – a welcome realisation – there are some important nuances here.
In particular, the Governor floated the idea that slow demand growth had less to do with tight policy than with supply being weak. We should not make too much of an off-the-cuff answer in a post-speech Q&A: it’s hard to get all the nuances into a short answer when there is a queue of other people wanting to ask questions. But this does raise the question of which way causation runs, and whether strong demand might in fact induce greater supply or weak demand weigh on supply. If so, tight monetary policy when both demand and supply are weak looks even less defensible.
The difficulty with this line of argument becomes clearer when comparing this discussion with the Governor’s answer to another question, about the labour market. There, Governor Bullock referenced a Bulletin article published the same day showing that the increase in labour force participation since the pandemic had not been a drag on productivity. The additional workers were not so new and green that they reduced the overall quality of the workforce. (This should not be a surprise: much of the increase in participation came from older workers just not retiring, and women returning to the paid workforce after stints demonstrating the executive management skills involved in wrangling small children.) It was a good thing, the Governor said, that a tight labour market had drawn more workers into employment. In this way, a tight labour market begat its own loosening by drawing in more supply. This kind of path dependence – known as ‘hysteresis’ to economists – is central to the understanding of why unemployment was so high in decades past but declined right across developed economies in the 2000s without spurring inflation. (This is the same mechanism that caused people to worry that the pandemic would cause ‘scarring’ in the labour market. There is a growing academic literature on this mechanism.)
In other words, the Governor was allowing for the possibility of some path-dependence in the labour market but had not quite translated this into an implication for the broader economy.
Communicating in many voices
In response to a question from another market economist, the Governor reiterated the point she made after the meeting: that these speeches cannot front-run the MPB meeting, because each member is just one member and does not speak for all. Explicitly taking issue with market pricing of future RBA moves is therefore not something we should expect to happen in future. In response to a media question, the Governor argued that surprising the market was neither a reason to do something or not do something. Put another way, the MPB will put no weight on whether its decision surprises the market. The Board will just try to do what it considers to be the right thing. (That ‘it considers’ language is a relatively recent addition to the final sentence of the media release and minutes, first included in the media release following the May meeting.)
That should not preclude, however, inter-meeting communication that hosed down a misconception in the market about how data is being interpreted. For example, the minutes clarified that models of the so-called ‘neutral rate’ were uncertain and not too much weight should be put on them or recent changes to some of them. It would not have been front-running the other MPB members to say in a speech, as the minutes did, that ‘public discussion of the stance of monetary policy had possibly overemphasised the inferences that could be drawn from these alternative models, especially for the near term’. (Looking back at my own note on the subject, I could have been blunter in my language, too, in my efforts to hose down this view.)
As we noted earlier in the week, though, the view of neutral becomes even more important – and fraught – the closer you get to where you think it is. MPB members who are still nervous about supply constraints and tight labour markets will want to tread slowly. As the Governor said in her speech, ‘[t]he Board continues to judge that a measured and gradual approach to monetary policy easing is appropriate’. That ‘measured and gradual’ language is a bit of an evolution from the ‘cautious and gradual’ language used in the minutes when discussing the views of the members who voted to hold rates in July, and the ‘move cautiously and predictably’ language of the May minutes. These small wording changes are likely to be simply different ways of saying the same thing: this is not a central bank that will rush policy easing
Stay informed with Westpac IQ
Get the latest reports straight to your inbox.
Related articles
Australia and NZ Weekly 28 July 2025
How the lucky country made its luck
Australia and NZ Weekly 21 July 2025
Browse topics
Disclaimer
©2025 Westpac Banking Corporation ABN 33 007 457 141 (including where acting under any of its Westpac, St George, Bank of Melbourne or BankSA brands, collectively, “Westpac”). References to the “Westpac Group” are to Westpac and its subsidiaries and includes the directors, employees and representatives of Westpac and its subsidiaries.
Things you should know
We respect your privacy: You can view our privacy statement at Westpac.com.au. Each time someone visits our site, data is captured so that we can accurately evaluate the quality of our content and make improvements for you. We may at times use technology to capture data about you to help us to better understand you and your needs, including potentially for the purposes of assessing your individual reading habits and interests to allow us to provide suggestions regarding other reading material which may be suitable for you.
This information, unless specifically indicated otherwise, is under copyright of the Westpac Group. None of the material, nor its contents, nor any copy of it, may be altered in any way, transmitted to, copied of distributed to any other party without the prior written permission of the Westpac Group.
Disclaimer
This information has been prepared by the Westpac and is intended for information purposes only. It is not intended to reflect any recommendation or financial advice and investment decisions should not be based on it. This information does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter into a legally binding contract. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. This information may contain material provided by third parties. While such material is published with the necessary permission none of Westpac or its related entities accepts any responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure this information is free from error, none of Westpac or its related entities warrants the accuracy, adequacy or completeness of this information, or otherwise endorses it in any way. Except where contrary to law, Westpac Group intend by this notice to exclude liability for this information. This information is subject to change without notice and none of Westpac or its related entities is under any obligation to update this information or correct any inaccuracy which may become apparent at a later date. This information may contain or incorporate by reference forward-looking statements. The words “believe”, “anticipate”, “expect”, “intend”, “plan”, “predict”, “continue”, “assume”, “positioned”, “may”, “will”, “should”, “shall”, “risk” and other similar expressions that are predictions of or indicate future events and future trends identify forward-looking statements. These forward-looking statements include all matters that are not historical facts. Past performance is not a reliable indicator of future performance, nor are forecasts of future performance. Whilst every effort has been taken to ensure that the assumptions on which any forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from any forecasts.
Conflicts of Interest: In the normal course of offering banking products and services to its clients, the Westpac Group may act in several capacities (including issuer, market maker, underwriter, distributor, swap counterparty and calculation agent) simultaneously with respect to a financial instrument, giving rise to potential conflicts of interest which may impact the performance of a financial instrument. The Westpac Group may at any time transact or hold a position (including hedging and trading positions) for its own account or the account of a client in any financial instrument which may impact the performance of that financial instrument.
Author(s) disclaimer and declaration: The author(s) confirms that (a) no part of his/her compensation was, is, or will be, directly or indirectly, related to any views or (if applicable) recommendations expressed in this material; (b) this material accurately reflects his/her personal views about the financial products, companies or issuers (if applicable) and is based on sources reasonably believed to be reliable and accurate; (c) to the best of the author’s knowledge, they are not in receipt of inside information and this material does not contain inside information; and (d) no other part of the Westpac Group has made any attempt to influence this material.
Further important information regarding sustainability-related content: This material may contain statements relating to environmental, social and governance (ESG) topics. These are subject to known and unknown risks, and there are significant uncertainties, limitations, risks and assumptions in the metrics, modelling, data, scenarios, reporting and analysis on which the statements rely. In particular, these areas are rapidly evolving and maturing, and there are variations in approaches and common standards and practice, as well as uncertainty around future related policy and legislation. Some material may include information derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness or reliability of the information. There is a risk that the analysis, estimates, judgements, assumptions, views, models, scenarios or projections used may turn out to be incorrect. These risks may cause actual outcomes to differ materially from those expressed or implied. The ESG-related statements in this material do not constitute advice, nor are they guarantees or predictions of future performance, and Westpac gives no representation, warranty or assurance (including as to the quality, accuracy or completeness of the statements). You should seek your own independent advice.
Additional country disclosures:
Australia: Westpac holds an Australian Financial Services Licence (No. 233714). You can access Westpac’s Financial Services Guide here or request a copy from your Westpac point of contact. To the extent that this information contains any general advice, it has been prepared without taking into account your objectives, financial situation or needs and before acting on it you should consider the appropriateness of the advice.
New Zealand: In New Zealand, Westpac Institutional Bank refers to the brand under which products and services are provided by either Westpac (NZ division) or Westpac New Zealand Limited (company number 1763882), the New Zealand incorporated subsidiary of Westpac ("WNZL"). Any product or service made available by WNZL does not represent an offer from Westpac or any of its subsidiaries (other than WNZL). Neither Westpac nor its other subsidiaries guarantee or otherwise support the performance of WNZL in respect of any such product. WNZL is not an authorised deposit-taking institution for the purposes of Australian prudential standards. The current disclosure statements for the New Zealand branch of Westpac and WNZL can be obtained at the internet address www.westpac.co.nz .
Singapore: This material has been prepared and issued for distribution in Singapore to institutional investors, accredited investors and expert investors (as defined in the applicable Singapore laws and regulations) only. Recipients of this material in Singapore should contact Westpac Singapore Branch in respect of any matters arising from, or in connection with, this material. Westpac Singapore Branch holds a wholesale banking licence and is subject to supervision by the Monetary Authority of Singapore.
U.S.: Westpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. The services and products referenced above are not insured by the Federal Deposit Insurance Corporation (“FDIC”). Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). In accordance with APRA's Prudential Standard 222 'Association with Related Entities', Westpac does not stand behind WCM other than as provided for in certain legal agreements between Westpac and WCM andobligations of WCM do not represent liabilities of Westpac. This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. Transactions by U.S. customers of any securities referenced herein should be effected through WCM. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments.
The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person of WCM or any other U.S. broker-dealer under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.
UK and EU: The London branch of Westpac is authorised in the United Kingdom by the Prudential Regulation Authority (PRA) and is subject to regulation by the Financial Conduct Authority (FCA) and limited regulation by the PRA (Financial Services Register number: 124586). The London branch of Westpac is registered at Companies House as a branch established in the United Kingdom (Branch No. BR000106). Details about the extent of the regulation of Westpac’s London branch by the PRA are available from us on request.
Westpac Europe GmbH (“WEG”) is authorised in Germany by the Federal Financial Supervision Authority (‘BaFin’) and subject to its regulation. WEG’s supervisory authorities are BaFin and the German Federal Bank (‘Deutsche Bundesbank’). WEG is registered with the commercial register (‘Handelsregister’) of the local court of Frankfurt am Main under registration number HRB 118483. In accordance with APRA’s Prudential Standard 222 ‘Association with Related Entities’, Westpac does not stand behind WEG other than as provided for in certain legal agreements (a risk transfer, sub-participation and collateral agreement) between Westpac and WEG and obligations of WEG do not represent liabilities of Westpac.
This communication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. This communication is not being made to or distributed to, and must not be passed on to, the general public in the United Kingdom. Rather, this communication is being made only to and is directed at (a) those persons falling within the definition of Investment Professionals (set out in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”)); (b) those persons falling within the definition of high net worth companies, unincorporated associations etc. (set out in Article 49(2)of the Order; (c) other persons to whom it may lawfully be communicated in accordance with the Order or (d) any persons to whom it may otherwise lawfully be made (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this communication or any of its contents. In the same way, the information contained in this communication is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Conduct Authority and is not intended for “retail clients”. Westpac expressly prohibits you from passing on the information in this communication to any third party.
This communication contains general commentary, research, and market colour. The communication does not constitute investment advice. The material may contain an ‘investment recommendation’ and/or ‘information recommending or suggesting an investment’, both as defined in Regulation (EU) No 596/2014 (including as applicable in the United Kingdom) (“MAR”). In accordance with the relevant provisions of MAR, reasonable care has been taken to ensure that the material has been objectively presented and that interests or conflicts of interest of the sender concerning the financial instruments to which that information relates have been disclosed.
Investment recommendations must be read alongside the specific disclosure which accompanies them and the general disclosure which can be found here. Such disclosure fulfils certain additional information requirements of MAR and associated delegated legislation and by accepting this communication you acknowledge that you are aware of the existence of such additional disclosure and its contents.
To the extent this communication comprises an investment recommendation it is classified as non-independent research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and therefore constitutes a marketing communication. Further, this communication is not subject to any prohibition on dealing ahead of the dissemination of investment research.