Australia central bank warns of rising inflation, slower growth as oil shock bites

SYDNEY, May 5 (Reuters) – Australia’s central bank on Tuesday sharply raised its inflation forecasts, while downgrading the outlook for economic growth and employment as a global energy shock from the Gulf poses major challenges for monetary policy. Headline inflation is now seen peaking near 5%, and ​sub par economic growth is expected for the next two years. The updated forecasts from ‌the Reserve Bank of Australia’s economics unit come as policy makers are widely expected to raise interest rates by a quarter-point to 4.35%, the third hike of the year and reversing all of the easing delivered in 2025. In its quarterly Statement on Monetary Policy, published separately from the Board’s rate decision, the RBA also considered two adverse scenarios where the Strait of ‌Hormuz ​remains closed for longer, with shipping flows only resuming from the first ⁠quarter of 2027. “It is possible there ⁠is much more protracted disruption to global energy supply than we assumed in the baseline forecast,” said the RBA. The baseline forecast assumes the Strait of Hormuz would be open soon. “A much larger pullback in spending by households and businesses in response to the heightened uncertainty would be expected ​to create more spare capacity in the economy and result in inflation returning to target sooner than otherwise.” The RBA noted the conflict boosted domestic fuel prices by a third, though a halving of fuel ⁠excise duties did provide some offset. Yet, it noted timely ⁠indicators did not suggest a sharp slowing in real household inecomes or a ​weakening in demand. It was not clear if financial conditions were restrictive even after two rate hikes, and survey measures ​of households’ short-term inflation expectations had increased sharply. The RBA used the technical assumption of ‌60 basis points of policy tightening this year to 4.70%, equivalent to a little over two rate rises. It had already raised interest rates in February and March. Consumer price inflation, which ran at 4.1% in the first quarter, is expected to peak at 4.8% in the June quarter, far above the RBA’s 2%-3% target ⁠band. That assumes Brent oil prices hover around $100 a barrel. Brent crude futures currently trade at around $110 a barrel. Underlying inflation – a trimmed mean measure closely watched by the RBA – is projected to accelerate to 3.8% by ⁠June, from 3.5% currently. It was seen ‌falling back to 2.5% by mid-2028, as the economy and the labour market ⁠weakened. Amid higher borrowing costs and geopolitical uncertainties, economic growth is now expected ​to slow ‌to a below-trend rate of 1.3% by the end of the year, ​from 1.8% before, ⁠driven by weaker household consumption and business investment. The labour market was expected to ease further, with the jobless rate now forecast to peak at 4.7% by the end of the year, up sharply from 4.3% previously. Under the adverse scenarios where Brent crude prices peak at $145 a barrel, domestic GDP is likely to be around 0.5% to 0.8% lower and unemployment could peak at 5.1%, the RBA added. (Reporting by Stella Qiu, Editing by Wayne ​Cole) ((yifan.qiu@thomsonreuters.com; +61 0 427901124;))Keywords: AUSTRALIA RBA/POLICY