• Domestic data has been overshadowed by tariff chaos, with changes to US trade policy shifting the distribution of risks to the growth and inflation outlook in Australia.
• Consequently, we have slightly revised down our forecasts, with domestic growth now expected to be 2.0% over 2025 (was ~2¼%) and the unemployment rate forecast to peak at around 4.4% (was 4.2%).
• With a larger headwind emanating from the global backdrop, we now see the RBA easing more quickly to reach a neutral stance (3.10%) by Q3.

Tariff announcements from the US since April 2nd have led to significant market volatility. Though Australia faces only the baseline tariff level (10%), these announcements have shifted global and domestic risks to the downside.

Domestically, the outlook was little changed before tariff announcements. Labour market resilience has continued but remains non-inflationary, in our view. The February monthly CPI provided further evidence that inflationary pressures are easing, especially across the important market services components, and we continue to expect Q1 CPI to print slightly below RBA forecasts. Before tariffs, we did not view inflation as a barrier to a gradual easing of monetary policy as the RBA became more comfortable with an unemployment rate in the low 4s.

However, the drag on global growth from tariffs and uncertainty are now more pressing and we have slightly revised our Australian economic forecasts this month in response to a weaker global growth forecast. The revisions are not large (we now expect 2.0% economic growth over 2025 vs 2¼%, and a peak unemployment rate of 4.4% vs 4.2%, before edging back down to around 4¼% at end 2026) because we expect lower interest rates can offset larger impacts on growth and inflation.

This is outlined in our revised RBA rate path. We now expect the RBA to cut by 50bps in May, followed by 25bp easings in July, August, November and February. This path reaches neutral more quickly than previously expected (3.1% in August), which is a more appropriate policy stance given the shock imposed by changes to US trade policy. We then expect the RBA to cut to modestly accommodative territory after a short pause to reach a cyclical low of 2.6% in February. We retain our view that rates will settle in the low 3s longer term, and view the visit below 3% as only temporary.

However, we note that there is a wide error band around our forecasts amidst ongoing tariff developments. The risks to the outlook are significant: there is potential for further tariff surprises and market volatility, as well as more significant than expected flow-through to weaker Australian business and consumer sentiment and activity.

For further details, please see The Forward View Australia (April 2025)