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Unemployment needs to reach 5% to cool inflation

We believe that the “narrow path” of returning inflation to target while keeping unemployment below pre-pandemic levels is wishful thinking. The Reserve Bank of Australia won’t bring domestic cost pressures under control unless the unemployment rate rises to around 5%. With most of the drag from the previous policy tightening already behind us and the labour market still tight, we think the Bank won’t be able to cut interest rates as sharply as most anticipate.

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