Australia central bank lifts inflation forecasts, assumes no rate cuts until 2025 By Reuters

SYDNEY, May 7 (Reuters) – Australia’s central bank on Tuesday sharply raised its outlook for headline inflation and removed any chance of a rate cut from its forecasts this year, suggesting borrowers might see no rate relief until well into 2025.

Reacting to a disappointingly high inflation reading for the first quarter, economists at the Reserve Bank of Australia predicted inflation would only slow as hoped if rates stayed at 4.35% for longer.

“The cash rate is assumed to remain around its current until mid-2025, around nine months longer than assumed in February,” the RBA said in its quarterly Statement on Monetary Policy.

The RBA’s economists now expect consumer inflation, which was running at 3.6% in the first quarter, to pick up to 3.8% by June and stay there until the end of the year. That compared with the previous forecast of it slowing to 3.2% by end-2024.

That factors in a labour market that is proving tighter than expected with unemployment rate not far from 50-year lows at 3.8%. That is expected to climb to 4.0% by June and 4.2% by December, lower than the previous forecasts of 4.2% and 4.3%.

High fuel prices and the unwinding of government energy rebates are also part of the reasons that inflation will stay elevated this year.

“There may be less spare capacity in the economy than we currently judge,” said the RBA in a 60-page document. “There is a risk that the forecast easing in the labour market is not sufficient to return inflation to target if we have misjudged the degree of spare capacity.”

Still, the RBA judged inflation was still expected to be back in the 2-3% target range in late 2025, but that’s only because those forecasts are based on market pricing of no rate cuts until mid-2025.

The RBA noted there had been a drastic shift in the technical assumptions that the forecasts were based on, as markets reacted to the disappointingly high inflation release.

Policymakers are widely expected to hold interest rates steady on Tuesday at 4.35% for a fourth meeting, but the focus is on whether the central bank will reinstate a tightening bias after just removing it in March.

The RBA still judged disinflation would continue, with the trimmed mean measure easing to 3.8% by June and 3.4% by the year-end.

Investors have already abandoned any hopes of policy easing this year after data showed that the labour market was only easing gradually and…