Westpac Group chief economist Luci Ellis (pictured) has challenged long-held assumptions about the role of monetary policy and productivity growth, warning that overly tight settings could damage Australia’s long-run growth potential.
Her comments follow fresh data showing consumer confidence at its highest in more than three years, with the Westpac-MI index jumping 5.7% in August after the RBA’s third rate cut of 2025. With inflation back within target, households are more optimistic about housing and spending, reinforcing Ellis’ call for supportive policy settings.
“Traditionally, economic theory has assumed that monetary policy is ‘neutral’ in the long run,” Ellis said in Westpac’s latest economics insights. “That is, it can affect inflation, and short-run fluctuations in growth and the labour market but it has no implications for growth or unemployment in the long run.”
“In Australia, the standard discourse also assumes that productivity growth is more or less fixed, or else determined by government policy. And until recently, it was assumed in many quarters that weak productivity growth meant that demand had to be constrained – by monetary and other policies – to match the weak growth in supply.”
Ellis asked the critical question: “What if we have it all backwards?”
Ellis highlighted a growing body of research suggesting that tight monetary policy can reduce long-term growth by discouraging investment and damaging labour outcomes.
“One way this might happen is that by slowing demand, tight monetary policy reduces the incentive to invest, and thus the future capital stock and future productivity,” she said. “This is on top of the ‘scarring’ effects on workers that we normally think of as long-run effects of recessions.”
She added that the same concerns extend beyond monetary policy to other settings that weaken incentives to invest in skills and capital.
“Policies that reduce the incentive to invest in the right labour skills and smarts or labour-saving stock of capital reduce future productivity growth,” Ellis said.
“More broadly, we need to remember that skills and stocks are stocks, not flows. Short-run changes to the stock of something – whether a workforce, a capital stock or a housing stock – can have long-lasting effects on economic outcomes.”
Ellis said the Reserve Bank’s decision to stop interpreting weak productivity as a reason to suppress demand was significant.
“This is why the RBA’s pivot to no longer believing that weak productivity growth requires it to tamp down demand is so consequential – and so welcome. That change of heart avoids what could have become a significant policy error,” she said.
The shift comes as other central banks also ease policy: the RBNZ cut rates in August and the US Federal Reserve is under scrutiny ahead of Fed Chair Jerome Powell’s Jackson Hole speech.
Ellis also pointed to the skilled migration program as an area where policy design could inadvertently undermine productivity by discouraging investment in local workers and labour-saving technologies.
“While it is widely admired as being targeted on skills shortages and effective in its operations, an issue arises where a skill shortage is defined to be any moment where you cannot find the right person at the current wage,” she said.
“If you can obtain an essentially infinite supply of people with the necessary skills from offshore at the current wage rate, why try to entice the local worker with a somewhat higher wage? And more to the point, why train local workers, or invest in labour-saving capital when you can always get someone from offshore at the current wage rate?”
Ellis argued that “it would help to set the bar for defining a skills shortage higher than the current wage rate.”
The broader lesson, Ellis said, is that policymakers need to focus on long-term stock measures – such as skills, capital and productivity-enhancing processes – rather than short-term flows.
“The stock of capital and the skills of workers are stocks of this kind,” she said. “The smarts of the way we design our business processes are also long-lasting. Flows, by contrast, are inherently more ephemeral.”
“Getting things wrong with the stocks is far more consequential than the problems that many current policy proposals are designed to fix.”
For brokers, the combination of falling rates, rising confidence, and a more supportive policy stance is already shaping client behaviour.
Borrowers are becoming more open to refinancing conversations and purchase strategies as demand re-energises. At the same time, supply and affordability pressures mean brokers play a vital role in helping clients act decisively in competitive markets while also planning for long-term resilience.
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