SYDNEY, May 20 (Reuters) - Australia's central bank on Tuesday said inflation would be lower and unemployment higher due to the cascading effects of global trade tensions, and that was even assuming interest rates were cut as deeply as markets expected.
In its quarterly Statement on Monetary Policy, released on Tuesday, the Reserve Bank of Australia (RBA) said core inflation had cooled a little faster than expected, with a notable slowing in the service sector.
It also warned the drag from U.S. President Donald Trump's tariffs would lower global growth and prove disinflationary in net terms for Australia.
"The weaker global outlook contributes to a slightly larger increase in the unemployment rate and a slightly lower inflation rate," the RBA said in a 64-page economic update. "An escalation of the trade conflict is a key downside risk."
The RBA is widely expected to cut interest rates by a quarter-point to 3.85% on Tuesday as cooling inflation at home provides scope to take out policy insurance.
Its new forecasts were based on market pricing that assumed a total policy easing of 85 basis points to a terminal rate between 3.1% and 3.35%.
Headline consumer price inflation held at 2.4% in the first quarter and a key trimmed mean measure of core inflation slowed to 2.9%, taking it back into the RBA's target band of 2% to 3% for the first time since late 2021.
Due to a weak global backdrop and soft consumer demand, Australia's economic growth was expected to pick up to 2.1% by the end of the year, up from 1.3% in 2024 but short of its previous forecast of 2.4%.
While the economy has developed largely as it expected, the RBA did note a downside surprise in consumer spending with shoppers being highly price conscious. It now expects household consumption growth of just 1.9% by the end of the year, down from 2.6% previously.
It trimmed forecasts for headline inflation, reflecting the extension of government electricity rebates. The headline consumer price index (CPI) was now seen peaking at 3.1% by mid-2026, before trending lower to 2.6% by mid-2027.
Underlying inflation - a trimmed mean measure closely watched by the RBA - is expected to slow to 2.6% by the June quarter, down from 2.7%, and in line with the 2.5% midpoint of its target band.
The RBA still considered the labour market to be relatively tight, though wage growth has still moderated over the past year. It now sees the jobless rate, which has held at 4.1% for over a year now, to tick up to 4.3% by the end of this year and hold there, compared with a previous forecast of 4.2%.
(Reporting by Stella Qiu; editing by Wayne Cole)
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Keywords: AUSTRALIA ECONOMY/RBA
