Australian firms are noticing an easing in a key business pressure, taking some steam out of calls for the Reserve Bank to hike interest rates.
But while capacity utilisation cooled slightly in December, it remains above the long-run average and won’t stop the central bank from lifting borrowing costs if it feels inflation data, set to be released on Wednesday, is still running too hot.
Capacity utilisation, which measures how close a business is running to its maximum productive potential, fell 0.3 percentage points to 83.2 per cent in December, according to NAB’s monthly business survey.
NAB chief economist Sally Auld said capacity utilisation remained elevated and broad-based, with five of eight industries still trending above their long-run averages.
“While the small decline in capacity utilisation in the month will be welcome, it is unlikely to ameliorate the RBA’s concern that the economy is pushing up against capacity constraints,” she said.
“This is especially the case given mounting evidence that domestic demand was stronger than expected in the fourth quarter of 2025.”
The importance of capacity utilisation to the RBA’s thinking was highlighted in a speech given by the bank’s deputy governor Andrew Hauser in November.
Speaking shortly after the Melbourne Cup, Mr Hauser said Australia’s economy risked being “boxed in” by its own capacity constraints.
Without a rebound in productivity, Australia’s economy could not grow much faster without pushing up inflation, he said.
That raises the implication that the RBA’s hand would be forced to tighten monetary policy to get price growth under control.
Since then, consumer demand has proven stronger than the RBA expected and inflation has continued to run above its 2-3 per cent target band.
Minutes from the RBA’s December rates meeting revealed board members were keeping a close eye on NAB’s survey, noting “capacity constraints had increased further above historical averages”.
Despite rising fears that the RBA will be forced to lift interest rates to cool the economy, business confidence improved slightly to three points in December, NAB revealed.
Business conditions also firmed, with both measures running above their long-run average.
Cyclically sensitive industries, such as retail and manufacturing, were the most improved.
“The survey is consistent with the view that momentum improved in the Australian economy in the fourth quarter of the year,” Dr Auld said
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