Bank of America (BofA) revised its growth forecast for the Australian economy, indicating a modest downturn for 2025. The forecasted Gross Domestic Product (GDP) growth rate has been lowered from an initial 1.9% to 1.6%. This adjustment is attributed to weaker global growth impacting export volumes and heightened uncertainty that is dampening consumption and investment.
Despite this, BofA has increased its 2026 growth forecast slightly from 2.0% to 2.2%, anticipating a positive fiscal impulse, cash rate cuts by the Reserve Bank of Australia (RBA), and a rise in global growth to bolster demand.
In addition to GDP adjustments, BofA has also trimmed its inflation forecasts for Australia. Inflation is now expected to be 2.6% in 2025, down from the previously projected 2.9%, due to softer domestic demand leading to lower non-tradable inflation, as well as decreased oil prices and trade diversion impacting tradable inflation.
However, inflation is projected to increase to 2.8% in 2026 as the economy accelerates and stimulus measures drive higher prices. Despite the downward revision, inflation is anticipated to stay above the midpoint of the RBA’s target range in both 2025 and 2026.
The RBA’s forecast remains unchanged, with BofA maintaining its prediction that the central bank will implement a 25 basis point rate cut in May to counteract the negative growth effects stemming from global trade tensions. The present conditions, including underlying inflation above the target and unemployment below the non-accelerating inflation rate of unemployment (NAIRU), suggest that the RBA may adopt a cautious stance.
The central bank is expected to evaluate the impact of tariffs carefully before deciding on any aggressive rate cuts. Nevertheless, there is a shifted risk distribution that could lead the RBA to ease monetary policy more than BofA’s current forecast, which anticipates two additional 25 basis point reductions in 2025 in response to the downside risks to growth.