Australian economy faces a pivotal moment, with the tightest recovery in decades and a critical need for investment in capacity expansion to prevent being "boxed in" by current economic constraints, said Andrew Hauser, the central bank's deputy governor.

Over the past year, despite slow gross domestic product growth and persistent inflation, the Reserve Bank of Australia adopted a cautious stance on interest rate cuts, anticipating that strong public demand, tax cuts, and easing inflation would support medium-term growth, prompting a reduction in policy restrictiveness from February to August, according to Hauser.

He added that despite a stronger-than-expected recovery, the absence of spare capacity presents a unique challenge for monetary policy, as inflation remains above target and the economy continues to grapple with weak supply growth.

Hauser presented three possible scenarios for Australia's economy: one where growth persists without driving inflation, enabling policy easing, another where capacity limits restrict expansion, requiring tighter monetary policy, and a third where investing in technology and infrastructure is key to achieving sustainable growth.

He emphasizes the need for investment to expand capacity, pointing to Australia's strong fundamentals and highlighting the challenge of whether the country can achieve sustainable long-term growth amid inflation and capacity constraints that will influence the RBA's decisions.