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The 25 basis point cut to interest rates provides relief for households and businesses but does not address Australia's lacklustre productivity growth, says the accounting industry.
Rate cut offers relief but won't resolve productivity crisis: CPA
21 May 2025
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9 minute read
The Reserve Bank of Australia lowered the cash rate target by 25 basis points to 3.85 per cent in its decision this week. The reduction in interest rates follows further drops in underlying inflation, with recent figures indicating it had fallen within the RBA's target range.
Accounting body CPA Australia said while the cut to interest rates will bring welcome relief for many households and small businesses, it won't address Australia's underlying productivity crisis.
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CPA Australia’s Business Investment Lead, Gavan Ord said the rate cut will be met with a "sigh of relief from households and businesses" who have been counting on another rate cut to boost their cashflow.
“After multiple rate rises, persistent inflation and cost-of-living pressures, consumer and business confidence remain subdued. This cut should lift sentiment slightly and put a bit more money back into people’s pockets," sad Ord.
“But rate cuts will not get Australia out of its productivity straitjacket. Significant reforms are needed to move the needle on economic growth.”
CPA Australia has urged federal and state governments to prioritise policies that support business investment and innovation. This includes reducing red tape and initiating public discussions on substantive tax reform.
“We need to revitalise the business environment by removing unnecessary regulatory burdens and supporting entrepreneurship,” Ord said.
BDO economics partner Anders Magnusson agreed that while mortgage holders will welcome some relief in their monthly repayments, the real challenge for Australia lies in lifting productivity.
"Wage growth reached 3.4 per cent in the March quarter, but sustained increases in real incomes depend on ongoing productivity gains," said Magnusson.
"Without them, inflation can erode the value of wages, leaving workers with larger pay cheques but no real improvement in purchasing power."
Magnusson noted that productivity growth had been sluggish for decades, with some sectors even going backwards, such as construction.
"Encouragingly, the Productivity Commission has gained momentum, supported by an emboldened federal government and an emerging reform agenda," he said.
"The RBA forecasts productivity growth to reach 1 per cent by the end of next year. Hitting that target will be important, but productivity is a long game—reform efforts must take a long-term perspective."
Magnusson said the RBA was likely to maintain a cautious stance over the next few months amid ongoing global uncertainty.
"If productivity fails to rise as anticipated, rising labour costs could place pressure on businesses and erode workers’ buying power," he said.
"While markets expect two further rate cuts by the end of this year, the RBA will be watching these dynamics closely. Ultimately, without meaningful productivity reform, monetary policy alone cannot deliver lasting improvements in living standards.”
RSM Australia economist Devika Shivadekar said the latest cut to interest rates this week means lower borrowing costs for businesses and may therefore help tackle Australia's productivity issue.
“Many of our clients have told us that rising unit labour costs are hitting hard due to low productivity. By easing financial pressure, this rate cut could give businesses the confidence to invest in the infrastructure and technology needed to lift productivity over the long term," said Shivadekar.
Chartered Accountants chief economist, Richard Holden said while the decision was no surprise, the RBA's statement explaining its move has shed further light on the Board's thinking.
Holden said President Trump’s tariffs played a pivotal role in the RBA’s decision to cut.
“While the RBA saw the outlook for the domestic economy as fairly strong, geopolitical uncertainty could affect the consumption of Australian households," said Holden.
“The fact that underlying inflation fell just back into the RBA target band (at 2.9 percent) in the March quarter provided the conditions for the Board to make a cut as a hedge against slowing growth.
Holden said while the decision yesterday was easy to predict, future RBA meetings will need to carefully balance the inflationary effects of Trump’s tariffs through global supply chain disruptions, and the negative effects on economic growth.
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