Our economic outlook for Australia

Australia’s economic challenge continues to be predominantly supply‑driven. Weak productivity growth has lowered the economy’s potential growth rate. The unemployment rate, at 4.1%, remains well below the Reserve Bank of Australia (RBA) full-employment estimate, keeping upward pressure on unit labor costs. In this environment, even a moderate recovery in private demand and GDP risks stalling the disinflationary progress seen last year.

Headline inflation reached 3.8% year over year in January. We expect quarterly trimmed mean inflation, which excludes items at the extremes, to remain above the RBA’s 2%–3% target band in coming quarters, although gradual easing is likely as the effects of tighter policy continue to flow through the economy. Higher oil prices related to conflict in the Middle East represent an upside risk to our view on inflation.

Judging that a material risk exists for inflation to remain above target for longer than previously expected, the RBA raised its cash rate target by 25 basis points to 4.1% on March 17. (A basis point is one-hundredth of a percentage point.) We continue to expect the RBA to maintain a “higher‑for‑longer” policy stance. We have revised our assessment of the year-end policy rate to 4.35%, suggesting one further RBA rate hike this year. We expect the RBA to place greater weight on its price‑stability mandate, further pushing policy into restrictive territory to curb aggregate demand and keep inflation expectations anchored.