The central bank expects the jobless rate to tick higher than previously thought as inflation remains stubbornly high and dampens economic growth.
The Reserve Bank of Australia now expects the unemployment rate to hit 4.25 per cent by the end of 2024, up from the four per cent forecast in August.
In the November statement on monetary policy, the bank also downgraded its growth forecasts since the last pulse check in August.
GDP is likely to hit a floor of 1.5 per cent by late 2023 and the first half of 2024 before starting to recover, according to up-to-date forecasts.
In August, the bank expected growth to bottom out at 1.75 per cent by late 2024.
As previewed through the October cash rate decision on Tuesday, the RBA has also upgraded its peak inflation forecast and now expects it to reach eight per cent before the end of the year and then stay higher for longer.
The RBA said there's a lot of uncertainty hanging over its inflation forecasts.
Some inflationary factors are easing off such as high shipping costs largely caused by COVID, but others such as energy prices remain elevated beyond expectations.
Flooding in parts of the country is also likely to drive up food prices.
"The most recent round of flooding looks set to prolong the effect on food prices to at least the end of the year," the RBA said.
The central bank has been lifting interest rates rapidly to temper demand and cool inflation, delivering the seventh rate rise in a row on Tuesday to bring the official cash rate to 2.85 per cent.
Treasurer Jim Chalmers said the RBA's updated forecasts emphasised the severity of the inflation challenge.
He said his first budget, handed down last week, provided responsible cost of living relief without putting any additional pressure on inflation.
The RBA has also revised its expectations for wages slightly. It still sees the wage price index peaking at 3.9 per cent (it is sitting at 2.6 per cent), but sees wages growth accelerating more rapidly.
The RBA noted wages growth had already started to pick up due to the highly competitive jobs market and inflationary pressures allowing workers to demand higher wages, as well as the flow-through of the Fair Work Commission decision in June on minimum and award wage rates.
"Broader measures of wages growth are expected to increase at a faster pace, as firms use bonus payments and other non-base remuneration to attract and retain staff," the RBA said.
The report said two-thirds of businesses captured in its business liaison program expect wages to grow by between three and five per cent.
Greens treasury spokesperson Nick McKim said the report from the RBA proved wages growth and untapped spending were not driving inflation.
"The RBA states that retail inflation is 'mainly driven by price increases rather than higher volumes'," he said.
"But having made this pertinent insight, in the next breath the RBA says that it needs to guard against possible wage claims that might arise because workers need more money to pay these higher prices."
Senator McKim said the RBA needed to halt its rate hikes and the government needed to step up and engage in tax reform.
A slowdown in retail trade volumes also suggested the surge in retail sales recorded by the Australian Bureau of Statistics earlier in the week was being driven by inflation rather than a growth in spending.
Retail sales volumes rose by 0.2 per cent in the September quarter, according to ABS data, the smallest lift in retail volumes since October 2021.
