Australia’s Reserve Bank has warned of tougher economic conditions after raising interest rates to an 18-year high, with new forecasts showing inflation remaining above target and unemployment rising further.
Although RBA staff do not expect the country to enter recession, the central bank’s latest economic outlook points to a weaker labour market and higher inflation lasting longer than previously anticipated.
Inflation is now forecast to reach 4.5 per cent by December before easing to 3.7 per cent in mid-2027. In August, the RBA had expected inflation to be 3.6 per cent at the end of this year and 2.8 per cent by June 2027.
The central bank said oil and refined products, including fuel, fertilisers and plastics, were 20 to 25 per cent more expensive than assumed in its earlier forecasts. Mineral and agricultural commodity prices have also risen amid supply chain disruption, the war in Ukraine and adverse weather linked to El Nino.
RBA forecasts weaker growth and rising unemployment
Higher interest rates and falling household incomes are expected to weigh on economic growth. However, the RBA does not forecast gross domestic product to contract in any quarter, meaning its projections avoid the usual definition of a technical recession.
Growth is forecast at 1.3 per cent in 2027, which is more optimistic than forecasts from NAB and Commonwealth Bank that the economy will expand by only 1 per cent.
The labour market is also expected to deteriorate more sharply than previously thought. The unemployment rate is forecast to reach 5.1 per cent by the end of 2028, putting a five before the figure for the first time in a long period.
Wages are projected to grow by 3.4 per cent in 2026. Once inflation is taken into account, real wages are expected to fall by 1 per cent, adding to pressure on household finances.
Businesses told the RBA that hiring intentions remained relatively healthy, but rising labour costs were becoming a concern. The global race to secure computer chips for the artificial intelligence investment boom has also pushed up prices for consumer electronics, with Apple’s new iPhone Duo due to retail from $3,500.
Employers are considering technology as a way to reduce costs. “Many contacts have noted they are looking to drive efficiency gains from improved rostering, staff reallocations and technological improvements,” RBA staff said in the Statement on Monetary Policy.
“Many firms are hopeful that AI-driven productivity gains will support more efficient use of existing staff resources and may influence future hiring decisions,” they added.
