Australia’s gross domestic product rose 2.3% year-on-year in the first quarter, just slightly below analysts’ expectations.

Economists polled by Reuters had forecast an expansion of 2.4%, compared with a 2.7% expansion in the fourth quarter of 2022. GDP rose 0.2% quarter-on-quarter, compared with 0.3% expected in a Reuters poll. .

Katherine Keenan, Head of National Accounts at the company Australian Bureau of Statistics“This is the sixth consecutive increase in quarterly GDP, but the slowest growth since the Covid-19 Delta restrictions in September 2021.”

“The main driver of GDP growth this quarter was private and public gross fixed capital formation,” Keenan said.

GDP data is key to the Reserve Bank of Australia’s monetary policy decision-making process. Just on Tuesday RBA surprised markets by raising its key interest rate by 25 basis points to 4.1%, an 11-year high.

Early Wednesday morning, Reserve Bank of Australia Governor Philip Lowe gave a speech at the Australian summit, Morgan Stanley reiterated its stance that the central bank would pursue a “narrow path” in the country’s monetary policy.

In this “narrow path” that Lowe envisions, Australian inflation will return to its target range of 2-3%, the economy will continue to grow and labor market gains will be maintained.

“It’s still possible to go down that road and our ambition is to do it. But it’s a narrow road and it’s likely to be bumpy, with risks on both sides,” Lowe said.

Lowe clarified that the intention to maintain improvements in the labor market “does not mean that [RBA] will tolerate persistently higher inflation.”

The decision to raise interest rates again was taken on Tuesday “to provide more confidence that inflation will return to target within a reasonable timeframe,” he said.

Lowe outlined the economic data points the RBA will be watching to form its moves forward, including the global economy, household spending and unit labor cost growth.

Abhijit Surya, who is an Australia and New Zealand economist at Capital Economics, thinks that while GDP has slowed and is forecast to slow further, productivity growth remains “modest”.

Surya wrote that GDP per hour worked fell 0.3% quarter-on-quarter in the period, leading to an annual productivity decline of 4.6%, the largest on record.

It also adds that labor market data suggest that productivity is most likely to weaken further this quarter, which will support unit labor cost growth and keep services inflation stubbornly high.

Surya currently has a top estimate of 4.35% for the RBA’s benchmark rate, but in light of the GDP data and Rowe’s speech, he points out that “there is a real risk that the RBA could raise rates even higher”.