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Fresh economic forecasts from the central bank show a faster pullback in growth and more sluggish wage growth but the Reserve Bank still expects inflation to return to target by mid-2025.
As previewed earlier in the week, the RBA is now expecting growth to bottom out at 1.25 per cent by the end of the year, a little under the 1.5 per cent trough predicted earlier.
Economic growth is then expected to gradually pick up to two per cent by mid-2025 as it recovers from higher inflation and interest rates, plus the improving property market which will bolster household wealth.
The RBA's statement on monetary policy released on Friday also revealed inflation cooling off more quickly in the near term compared to earlier predictions.
Headline inflation is now tipped to hit 6.25 per cent in June, down from 6.75 per cent from predictions earlier this year.
Inflation is still expected to hit the top of the RBA's target inflation band of two to three per cent by mid-2025, as per previous forecasts.
The RBA said there were a few reasons to believe inflation could prove more stubborn than expected, including if productivity growth remains weak, rents lift by more than expected, the wage-price feedback loop is stronger than expected, and if firms keep their prices high even as their costs fall.
"On the other hand, inflation could turn out to be lower than expected if the easing in goods inflation is faster or more widespread than anticipated, including because consumer spending is weaker," the statement read.
Wages are also on track to grow by less than expected, according to the RBA's forecasts, with the wage price index now expected to keep lifting and peak at four per cent by the end of the year.
Earlier forecasts had wages topping out at 4.2 per cent by the end of 2023.
The RBA said this level of wages growth would not hamper its ability to return inflation to target, provided productivity growth recovers.
Predictions for unemployment has also lifted a touch, with the jobless rate now expected to rise to 4.5 per cent by mid-2025.
