SYDNEY, Aug 11 (Reuters) - Australia's central bank warned on Tuesday that inflation risks were still tilted to the upside amid tensions in the Middle East, but expected cost pressures to cool a little quicker than previously thought as financial conditions remain tight.
Updated forecasts from the Reserve Bank of Australia's economics unit come as policy makers are widely expected to hold interest rates steady at 4.35% for a second meeting, after raising rates three times this year to tame inflation.
The RBA made only modest changes to its forecasts out to 2028 with economic growth a little more resilient, and inflation a little cooler. Unemployment was seen stable around the current 4.4% before rising to 4.8%.
In its quarterly Statement on Monetary Policy, published separately from the Board's rate decision, the RBA said subdued growth in demand is expected to bring the economy into balance next year, as the labour market has eased more than expected.
"We judge that the economy is likely to reach balance somewhat earlier than previously estimated and this will help reduce inflationary pressures in the economy."
The housing market has weakened by more than expected, which will likely weigh on household consumption and dwelling investments. The RBA expects a further slowing in housing credit in the months ahead.
Liaison with businesses showed firms were still grappling with elevated cost inflation but increasingly noted that consumer price sensitivity is constraining pass-through to selling prices.
As a result, the RBA expects inflation to ease back to the 2%-3% target band in the second half of next year. Consumer price inflation, which peaked at 3.9% in the second quarter, is expected to ease to 3.6% by the end of the year and to 2.6% by the end of 2027.
Underlying inflation - a trimmed mean measure closely watched by the RBA - is projected to slow to 3.3% by the end of the year, from a peak of 3.6% last quarter. It was seen falling back to 2.4% by mid-2028.
The labour market was expected to ease further, with the jobless rate now forecast to peak at 4.8% by mid 2028 year, up from 4.7% previously.
Amid higher borrowing costs, economic growth is now expected to slow to a below-trend rate of 1.4% by the end of the year, slightly higher than the previous forecast given a boom in business investment in data centres and faster population growth.
The RBA used the technical assumption the cash rate would average 4.4% to 4.5% over the next two years, in line with market pricing.
(Reporting by Stella Qiu, editing by Wayne Cole )
((yifan.qiu@thomsonreuters.com; +61 0 427901124;))
Keywords: AUSTRALIA RBA/POLICY
