SYDNEY, Nov 5 (Reuters) - Australia's central bank said on Tuesday underlying inflation was expected to slow gradually as it revised up its outlook for employment gains, while trimming forecasts for economic growth as consumers remained reluctant to spend.
In its quarterly Statement on Monetary Policy, released simultaneously as its interest rate decision, the Reserve Bank of Australia (RBA) judged demand in the economy still exceeded supply, though the gap was narrowing.
That is one reason that underlying inflation - a trimmed mean measure closely watched by the RBA - is expected to slow a just a touch to 3.4% by year-end from 3.5% in the third quarter, still above the target band of 2-3%.
The RBA then expect its to decline to 2.8% by late 2025 and 2.5% by the end of 2026.
"Inflationary pressures are expected to ease as demand and supply in the economy return to balance, although the pace of disinflation is expected to be gradual," said the RBA in a 61-page document.
The RBA has raised interest rates by 425 basis points since May 2022 to tame inflation and is widely expected to hold rates at 4.35% at its policy meeting on Tuesday.
The central bank noted financial conditions in Australia were still not as tight as in most other developed countries even after recent rate cuts there.
Crucially, the RBA still saw the labour market as tight following strong jobs growth in recent months. Some recent indicators, such as hours worked and underemployment, were proving resilient and the labour market was tighter than in most of Australia's peer economies .
Employment growth, which ran at 2.4% in the second quarter, is now expected to pick up to a rapid 2.6% by the end of the year before slowing to 1.4% by the year end.
Still, the jobless rate - which was currently at 4.1% - is expected to edge up to 4.3% by the end of the year, before reaching a peak of 4.5% by end-2025.
The headline consumer price index (CPI) was now seen dipping to 2.6% by end-2024, from the current 2.8%, thanks to government rebates on electricity bills. Once those rebates rolled off in mid-2025, CPI inflation was seen popping back up to 3.7% before easing again.
The RBA warned that a tightening in foreign student visa policy will result in lower net migration, which will weigh on growth from mid-2025. Economic growth is expected to slow to 1.5% by the end of the year before picking up to a trend 2.25% over the longer term.
Its forecasts were based on market pricing which assumed interest rates would stay at 4.35% until the middle of 2025, before hitting 3.5% by December 2026.