SYDNEY, May 5 - Australia's central bank has substantially revised up its inflation outlook while lowering expectations for economic growth and employment, citing a global energy disruption emanating from the Gulf as a significant challenge for monetary policy.
In an update from the Reserve Bank of Australia's economics unit, headline inflation is now forecast to peak close to 5%, and the economy is expected to record below-par growth over the coming two years. The revised projections accompany a widely anticipated 25 basis-point increase in the policy rate to 4.35% - the third rise of the year - which would reverse all of the easing put in place in 2025.
The RBA published its quarterly Statement on Monetary Policy separate from the Board's rate decision and included two adverse scenarios that assume the Strait of Hormuz remains closed for an extended period, with shipping flows resuming only from the first quarter of 2027. The bank cautioned: "It is possible there is much more protracted disruption to global energy supply than we assumed in the baseline forecast." The baseline itself assumes the Strait of Hormuz would be open soon.
In describing the potential macroeconomic consequences of a prolonged closure, the RBA noted that a pronounced pullback in spending by households and businesses in response to heightened uncertainty would likely increase spare capacity in the economy and could bring inflation back to target sooner than under the baseline.
The central bank said the conflict had pushed domestic fuel prices up by about one-third, though a halving of fuel excise duties provided some offset to those higher prices. Despite the sharp rise in fuel costs, the RBA observed that timely indicators did not signal a pronounced fall in real household incomes or a clear weakening in demand.
It also noted uncertainty about whether financial conditions were restrictive even after two prior rate increases, and highlighted that survey measures of households' short-term inflation expectations had risen sharply.
For its technical baseline, the RBA assumed 60 basis points of additional policy tightening this year, lifting the cash rate to 4.70% - a path equivalent to a little more than two further rate rises. The bank had already implemented rate increases in February and March.
Headline consumer price inflation, which ran at 4.1% in the first quarter, is forecast to reach 4.8% in the June quarter, well above the RBA's 2% to 3% target band. That projection assumes Brent crude prices remain around $100 a barrel. The bank noted that Brent crude futures were trading near $110 a barrel at the time of the report.
The RBA's preferred measure of underlying inflation - the trimmed mean - is projected to rise to 3.8% by June from 3.5% currently, before easing back to 2.5% by mid-2028 as the economy and the labour market weaken.
On the growth front, the bank now expects activity to slow to a below-trend pace of 1.3% by the end of the year, down from an earlier assumption of 1.8%. The downgrade is driven by weaker household consumption and reduced business investment amid higher borrowing costs and geopolitical uncertainty.
The labour market is also expected to soften. The RBA now projects the unemployment rate will peak at 4.7% by year-end, up from a prior forecast of 4.3%. In its adverse scenarios, where Brent crude prices peak at $145 a barrel, the bank estimates domestic GDP could be roughly 0.5% to 0.8% lower and unemployment could reach about 5.1%.
Implications for policy and markets
The updated forecasts highlight the tension facing the RBA: elevated and rising inflation driven in part by an energy shock, and a slowing economy that weakens the labour market. The bank's technical tightening path and explicit adverse scenarios indicate officials are preparing for both inflation pressures and downside risks tied to prolonged disruptions in global energy supply.
The combination of higher projected headline and underlying inflation, a reduced growth trajectory and an easing labour market suggests an extended period of policy uncertainty. That could influence borrowing costs for households and businesses, corporate investment decisions, and market expectations about the trajectory of interest rates.
Summary of the RBA's key numerical projections and assumptions
- Headline inflation expected to peak near 5%.
- Consumer price inflation ran at 4.1% in Q1 and is projected to hit 4.8% in the June quarter.
- Trimmed mean underlying inflation forecast to rise to 3.8% by June, from 3.5%, and fall to 2.5% by mid-2028.
- Policy rate assumed to reach 4.70% under a technical 60 basis-point tightening this year; an immediate quarter-point increase to 4.35% is widely expected.
- Economic growth downgraded to 1.3% by year-end, from 1.8% previously.
- Unemployment now forecast to peak at 4.7% by year-end, up from 4.3%; in an adverse oil-price scenario unemployment could reach about 5.1%.
- Baseline assumes Brent around $100 a barrel; futures were trading near $110 a barrel; adverse scenario uses $145 a barrel.
This assessment leaves policymakers balancing the need to restrain inflation with the risk that further tightening could exacerbate a slowdown in activity and employment. It also places focus on developments in global energy markets and the duration of any disruption to shipping through the Strait of Hormuz.