By Stella Qiu and Wayne Cole
SYDNEY (Reuters) -Australia’s central bank expects underlying inflation to fall faster than previously projected as it downgraded the economic outlook, although a still tight labour market is likely to create some lingering price pressures.
In its quarterly Statement on Monetary Policy, released on Tuesday along with its interest rate decision, the Reserve Bank of Australia (RBA) judged financial conditions were still restrictive, noting that a cash rate of 4.35% was above central estimates of the neutral rate.
In its 58-page economic update, the RBA said it has recently refined its models, which led to a shift downward in some estimates of the neutral rate – where policy neither stimulates nor drags on demand.
The central bank cut benchmark interest rates for the first time in five years on Tuesday, easing to 4.1% having held them steady at 4.35% for over a year.
Its new forecasts were based on market pricing, which assumed three quarter-point cuts this year – including the cut on Tuesday.
Underlying inflation – a trimmed mean measure closely watched by the RBA – is expected to slow to 2.7% by the June quarter from 3.2% last quarter, compared with a previous forecast of 3.0%.
The RBA then expects it to stay there until mid-2027, a little higher than 2.5% assumed in the November forecast.
“This is based on our judgment that the pick-up in momentum in domestic activity will maintain tight labour market conditions and sustain some upward pressure on inflation,” it said.
Indeed, the RBA no longer expects the labour market to loosen much further, even though it is still judged to be tight relative to full employment. It now sees the jobless rate, which ran at 4.0% in December, to tick up to 4.2% by June and stay there until mid-2027, compared with the previous forecast of 4.5%.
The headline consumer price index (CPI) was now seen holding at 2.4% by June. Once government rebates on electricity bills rolled off in mid-2025, CPI inflation was seen popping back up to 3.7% before easing again.
The RBA cautioned there was considerable uncertainty about the trade policies of the new U.S. administration, one reason the Australian dollar has fallen 2% on a trade-weighted basis to the bottom of its range since 2022.
Reflecting sluggish private sector demand, Australia’s economic growth is expected to have slowed to 1.1% late last year before recovering to 2.0% by June. That compared with previous forecasts of 1.5% and 2.3%.
Strong public spending should support growth even as household consumption remains soft.
(Reporting by Stella Qiu and Wayne Cole in Sydney; Editing by Sam Holmes)
