The central bank has sounded the alarm on inflation, warning it's prepared to do what's necessary to push it lower, while trying to keep the economy on track.
The Reserve Bank of Australia on Friday restated its forecast for annual inflation to reach 7.75 per cent at the end of this year, in line with Treasury estimates.
Its board wants to return inflation to the RBA's preferred target range of two-three per cent "over time", using its monetary policy tool.
"It is seeking to do this in a way that keeps the economy on an even keel," the RBA said in its quarterly Statement on Monetary Policy.
"The path to achieving this balance is a narrow one and subject to considerable uncertainty."
The board will take "further steps in the process of normalising monetary policy", it added, which means more interest rate rises are on the way.
Governor Phillip Lowe signalled last month that "normalising" implies a cash rate of around three per cent.
The RBA statement noted that financial market pricing implies an increase in the cash rate to around that level by the end of this year, from 1.85 per cent now, before peaking around 3.25 per cent in early 2023.
It's updated economic forecasts, contained in the statement, take that hawkish outlook - which is in line with the average of market economist forecasts - into account.
The forecasts in the RBA's May Statement on Monetary Policy assumed a cash rate of 1.75 per cent by the end of 2022 and 2.5 per cent by the end of 2023 - based on market pricing and economists' forecasts.
Turning to the economy, the RBA has downgraded most of its May growth forecasts.
While it still expects gross domestic product to have expanded by 3.5 per cent in the 2021/22 year, this is below Treasury's July forecast of 3.75 per cent.
But economy watchers will have to wait until September 7, when the Australian Bureau of Statistics releases the June quarter numbers, to see who is correct.
Looking ahead, the RBA has forecast growth of 2.25 per cent by the end of 2022/23 and 1.75 per cent in 2023/24.
Both forecasts have been cut from three per cent and two per cent, respectively, and are also below Treasury's latest estimates.
The downgrades reflect the eroding impact of inflation on wages and "faster increases in policy rate".
So while the economy is still expected to grow strongly over 2022, that won't be the case in the next two years.
"Further ahead, higher consumer prices, rising interest rates and declining housing prices are expected to weigh on growth in private spending, at the same time as growth in public demand slows," the RBA said.
The central bank also noted retail gas and electricity prices are expected to increase by 10-15 per cent in the second half of this year, adding to cost of living pressures.
"One uncertainty affecting the outlook for inflation is the possibility that inflation expectations and the general inflation psychology shift, and lead to the higher inflation being more persistent," the RBA added.
With the labour market being at its tightest in many years, employers are reporting difficulty in finding workers.
The RBA has improved its outlook for the unemployment rate, which it now expects to fall to 3.25 per cent in late 2022 - another record low - before edging back up to 3.5 per cent at the end of 2022/23.
The jobless rate was 3.5 per cent in June - the lowest in almost 50 years.
Pay packets, as measured by the wage price index, are expected to have risen by 2.6 per cent in the June quarter. That data won't be released until August 17.
Wages are then expected to grow by 3.4 per cent by the end of 2022/23 and 3.6 per cent in 2023/24.
"The tight labour market is expected to result in stronger wages growth over the period ahead, but growth in labour costs is expected to be below the rate of inflation for a time," the RBA said.
