SYDNEY, Feb 3 (Reuters) - Australia's central bank on Tuesday raised its forecasts for economic growth and inflation, warning that activity was hitting speed limits and a couple of increases in interest rates would be needed to bring it back into balance.
The updated forecasts from the Reserve Bank of Australia's economics unit comes as policy makers are widely expected to raise rates by a quarter-point to 3.85%, the first hike in two years and reversing some of the easing delivered in 2025.
Markets
have been wagering on a hike after fourth-quarter inflation surprised to the high side, while the unemployment rate dropped to a seven-month low in December.
In its quarterly Statement on Monetary Policy, published separately from the Board's rate decision, the RBA used the technical assumption of 60 basis points of rate rises this year, a reversal from November when markets had looked for one more cut.
"The path for monetary policy assumed in the forecasts - with cash rate rises this year - is expected to restore balance between aggregate demand and potential supply," it said.
The RBA also noted it was uncertain whether financial conditions remained restrictive after three rate cuts last year.
"Some indicators suggest that financial conditions may now be somewhat accommodative," it said. That was a big change from November when it had thought conditions were still tight.
The economy is also judged to be further from balance than previously assessed, particularly in the near-term, said the RBA as it revised up its forecast for the economy to expand by 2.1% by June this year, from 1.9% previously.
That was due to stronger household consumption, dwelling investment and business investment, the RBA said.
Coupled with stronger inflationary pulses in the economy, it now expects underlying inflation - a trimmed mean measure closely watched by the RBA - to accelerate to 3.7% by June, from the current 3.4%.
Core inflation was seen only falling back to 2.6% by mid-2028, which would still be above the mid-point of the RBA's target band of 2% to 3%.
The RBA judged the strength in inflation in the fourth quarter was due to less persistent factors such as food, travel and durable goods, but it was uncertain if price pressures will fade.
Headline inflation, which ran at 3.6% in the December quarter, is now seen peaking at 4.2% by mid-year in part due to the expiry of government electricity rebates.
The labour market was still judged to be tight. The central bank does not expect the job market to ease much further from here, with the jobless rate hovering steady at 4.3% this year, before prospects of higher rates drive it higher to 4.6% by mid-2028.
It also noted the appreciation in the Australian dollar, up about 5% against the greenback and on a trade weighted basis since November last year, has added to the tightening in the financial conditions, although the moves have been partly retraced in recent days.
Keywords: AUSTRALIA ECONOMY/RBA
