Australia is set for higher inflation, faster price growth and lower real income growth, the Reserve Bank has predicted in grim new forecasts.
Released alongside the central bank’s decision to lift interest rates by 0.25 percentage points on Tuesday, the updated forecasts produced by the bank’s staff hint at further rate hikes down the track to get inflation back to target.
The RBA uses market cash rate pricing as its base case assumption to inform its modelling for the broader economy.
At the time the bank was writing its last set of forecasts in November, markets expected the bank to cut rates one more time.
Ahead of Tuesday’s decision, that had flipped to two hikes in 2026.
But even with two hikes priced in, the RBA still forecast its preferred measure of core inflation would only get down to 2.6 per cent by June 2028.
This means the central bank does not expect two hikes in 2026 to be sufficient to bring inflation down to its point target of 2.5 per cent by the end of its forecast horizon.
Core inflation is still expected to be at 3.2 per cent by the end of 2026, compared to a forecast of 2.7 per cent in November.
The RBA said it had underestimated the strength in the economy, as international conditions proved better than expected.
Australian household consumption, business investment and the housing market all outperformed expectations.
With the unemployment rate below forecasts at 4.1 per cent, it appears there is even less spare capacity in the economy than previously thought.
That has contributed to the rise in inflation, although the RBA said some of that was still down to temporary factors, like volatility in some goods prices and domestic travel.
“Elevated capacity pressures are consistent with the recent pick-up in inflation, though less persistent sector-specific factors are assumed to explain most of the recent inflation surprise,” RBA staff said in the Statement on Monetary Policy.
The forecasts spell more pain for Australian workers, if borne out.
Workers wages’ are predicted to have gone backwards in real terms at the end of 2025, after eight consecutive quarters of real wages growth.
Real wages – which represent how much more or less money workers are taking home when accounting for the rise in prices – are expected to fall 0.9 per cent in the year to June, compared to November’s prediction of 0.5 per cent.
The unemployment rate is also expected to be higher than previously expected in the medium term, with the jobless rate set to hit 4.6 per cent by June 2028.
GDP is expected to be lower than previously predicted beyond June 2026, largely as a result of the higher cash rate pricing.