Australia's central bank has revised up its outlook for the economy and prices, saying economic activity is running into capacity limits and that a couple of interest rate increases will be necessary to realign demand and supply. The updated projections, released in the Reserve Bank of Australia's quarterly Statement on Monetary Policy, accompany a policy setting in which markets widely expect the RBA to lift the cash rate by 25 basis points to 3.85% - the first hike in two years and a partial reversal of easing that occurred in 2025.
The RBA's economics division now assumes 60 basis points of rate rises this year as its technical path for monetary policy, a clear change from the November outlook when markets were anticipating another cut. The bank said the assumed policy path - "with cash rate rises this year - is expected to restore balance between aggregate demand and potential supply," reflecting its view that demand pressures need to be eased.
Within the Statement, the RBA also flagged uncertainty about how restrictive financial conditions remain after three rate cuts last year. While the bank previously judged conditions to still be tight, it now says "Some indicators suggest that financial conditions may now be somewhat accommodative." That marks a notable shift in the RBA's assessment of how monetary settings are interacting with markets.
The upgraded growth forecast sees the economy expanding by 2.1% by June this year, up from a prior projection of 1.9%. The bank attributed the stronger near-term momentum to more resilient household consumption, increased dwelling investment and firmer business investment.
At the same time, the RBA raised its inflation outlook. The bank expects underlying inflation, measured by the trimmed mean that it watches closely, to accelerate to 3.7% by June from the current 3.4%. Core inflation is projected to fall only gradually, reaching 2.6% by mid-2028, which would remain above the mid-point of the RBA's 2% to 3% target band.
The central bank assessed that the intensity of inflationary pressure observed in the fourth quarter was driven in part by less persistent elements such as food, travel and durable goods, but it said there remains uncertainty over whether those price pressures will subside.
Headline inflation, which ran at 3.6% in the December quarter, is now expected to peak at 4.2% by mid-year. The bank noted that part of that near-term rise reflects the expiry of government electricity rebates.
The labour market continues to be judged tight. The RBA does not expect much near-term easing in the job market, forecasting the unemployment rate to remain around 4.3% this year. Its projection shows the jobless rate rising to 4.6% by mid-2028 as the effects of higher interest rates take hold.
The Statement also acknowledged currency movements. The Australian dollar has appreciated by about 5% against the US dollar and on a trade-weighted basis since November last year, and the RBA said that appreciation has contributed to tighter financial conditions, although some of those currency moves have been partly reversed in recent days.
Taken together, the RBA's updated projections present a picture of an economy that is slightly stronger than previously thought, with inflation pressures that have firmed and a labour market that remains tight. The technical assumption of further rate increases this year signals the bank's intent to rein in demand and bring inflation back toward the target band over time.