Reserve Bank of Australia Deputy Governor Andrew Hauser said the country’s monetary policy faces an “unusual challenge,” as the economy continues to run above its potential even after last year’s recovery began, leaving limited room for near-term rate cuts.Speaking at a UBS conference in Sydney, Hauser said that demand was “slightly” above potential output when GDP growth resumed last year — the tightest recovery phase since the early 1980s. While this strength reflects resilient activity and strong employment, it also limits how far the RBA can loosen policy without reigniting inflationary pressures.“That can still be consistent with bringing inflation back to target over the medium term,” Hauser said. “But achieving that goal will require policy to be restrictive enough to keep shrinking the gap over that period.”The deputy governor noted that Australia’s economic capacity remains tight, with little slack left in labour or supply conditions. “The absence of spare capacity is good news — it means busier companies and more jobs — but it does pose challenges for policy setting,” he added.The RBA last week kept its cash rate unchanged at 3.6%, pausing after three cuts earlier in 2025. Policymakers have turned more cautious amid stronger inflation, firmer household demand, and a rebound in the housing market. The central bank now expects inflation to remain above its 2–3% target range until at least mid-2026, reflecting continued capacity constraints.Hauser said rate cuts could resume from late 2025 to support growth but stressed that sustainable disinflation would require stronger productivity and investment in new capacity. “If we fail to do so, we may find ourselves boxed in on the rail. If we succeed, we could be off to the races,” he said. This article was written by Eamonn Sheridan at investinglive.com.