The neutral cash rate in Australia is likely to be higher than it was before the pandemic, according to an analysis by ANZ’s head of Australian economics, Adam Boyton, who has pointed to faster productivity growth in key sectors of the economy.
“Measures of productivity that tend to be most correlated with the neutral cash rate are showing faster growth than they recorded before the pandemic,” Boyton said. “As a result, the neutral cash rate will be higher than pre-pandemic.”
Average productivity growth across ANZ’s ex-mining measures since the March quarter of 2019 implies a real neutral cash rate of 0.7 per cent for the economy-wide ex-mining measure and 1.4 per cent for the market sector ex-mining.
Assuming inflation at the midpoint of the Reserve Bank of Australia’s (RBA) target band, this would result in a nominal neutral cash rate of either 3.2 per cent or 3.9 per cent.
“We accept that the latter estimate is likely to be on the high side of market participants’ expectations,” Boyton said. “That said, given the performance of the economy over the past year, it is arguably not excessively high.
“The former estimate appears reasonably consistent with what can be inferred from the RBA’s July board meeting minutes and the May Statement on Monetary Policy forecasts.”
Boyton further noted that the analysis supports ANZ’s judgement-based view that the neutral cash rate is likely to be in the 3.25 to 3.5 per cent range, suggesting that the current rate of 3.85 per cent is “not a particularly long way from neutral”.
While headline productivity trends have looked weak, with ABS data showing economy-wide gross domestic product (GDP) per hour worked has grown by an average of just 0.2 per cent annually over the past decade and declined 0.9 per cent over the past year, Boyton argued this masks significant variation across sectors.
“The rapid growth in the non-market sector and trends in the mining sector are having a material impact on productivity,” he said.
Productivity is difficult to measure in public sector-related parts of the economy, such as healthcare, education and public administration, according to Boyton, as these sectors tend to show little productivity growth and have expanded significantly since 2019, which mathematically drags down overall productivity.
Additionally, the mining sector’s influence has also distorted aggregate figures.
“Not only has productivity growth in the mining sector been weak, but the relative size of the sector has also fallen in recent years,” Boyton said. “That has an impact on aggregate productivity trends as the level of productivity in the mining sector is extremely high.”
In contrast, productivity growth at the business level has likely improved, spurred by post-pandemic labour market tightness and the accelerated adoption of technology, reflected in solid growth in the market sector productivity ex-mining.
To capture this more nuanced trend, ANZ has taken the average annual growth rate since Q1 2019, covering both the pandemic-era volatility and the apparent recent lift in productivity in non-mining sectors.
Shorter or narrower periods would be less reliable for estimating the neutral cash rate, Boyton noted.
He acknowledged that the 3.9 per cent nominal neutral estimate “is likely to be on the high side” but pointed to recent economic performance as support, such as the unemployment rate averaging 4.1 per cent in the June quarter 2024 and 4.2 per cent in the June quarter 2025, with GDP growth at 1.2 per cent and 1.3 per cent, respectively.
The lower 3.2 per cent estimate appears broadly consistent with the RBA’s own view, as inferred from the central bank’s July board meeting minutes and May forecasts.
“The RBA’s likely neutral cash rate estimate is by inference, therefore, likely to be a little over 3 per cent,” Boyton said.
He added that taking into account the typical lag in monetary policy transmission implies the true neutral rate is “a little higher than the ‘little over 3 per cent’” described by the RBA.
Boyton also echoed the caution expressed in the July board minutes around relying too heavily on averaging various models to estimate the neutral rate.
“Public discussion of the stance of monetary policy had possibly over-emphasised the inferences that could be drawn from these alternative models, especially for the near term,” he said.
