Productivity repair will pave the way for rate cuts

Australian labour market data released this week showed that hours worked per employee fell sharply in January, continuing a downtrend that began early last year. The deep slump in average hours worked means that, even if output growth remains subdued, we are likely to see a marked improvement in productivity going forward. The resulting moderation in unit labour cost growth should quickly filter through to weaker services inflation, helping to assuage the RBA's concerns about the persistence of "homegrown" inflation.