the labour market. with this in mind, rba staff are closely monitoring actual outturns and assessing their implication for the outlook for the labour market and inflation. to relate this to the chart, we ’ re evolving our assessment of whether we ’ re on the orange, blue or green lines. and the answer to this question is critical to the board, as a move to the scenarios depicted in green or orange may require a change in policy strategy – i ’ ll return to that point later. higher chinese fiscal spending external risks to the australian economy can also be interrogated with scenarios. at any given time, there are many known external risks ( as well as unknown unknowns ). deputy governor andrew hauser discussed one of the key unknowns, the global trading environment, in his speech earlier this week. 5 another current example of a material external risk is the path of future chinese fiscal policy. china is a large economy and australia ’ s largest export destination, which means its trajectory is important for australian monetary policy setting. one way we have explored that is to consider the effects of chinese fiscal spending being higher than expected. there are several ways this could affect the australian economy : 6 • stronger demand in china increases prices for commodities that australia exports as well as the price of chinese exports to australia. higher commodity prices increase australian corporate profits and government tax receipts, some of which could lead to increased spending. • stronger chinese demand also increases demand for other australian exports. services export volumes are more responsive to demand so there would likely be a direct activity channel for service exports. this could be offset to some extent, however, through adjustments via the exchange rate. • similarly, stronger demand in china lifts activity in china ’ s other trading partners, many of which are important destinations for australian exports. • financial channels impact the australian economy. while direct financial links with china are minimal compared with trade links, chinese activity influences exchange rates and asset prices. a large chinese stimulus package would likely be associated with an appreciation of the australian dollar and potentially boost equity market sentiment. the scenario we consider is a very large stimulus package, beyond what we have assumed in our current baseline forecast profile ( graph 4 ). it is not an outcome we think is likely to be announced in the near term. looking at a large, if unlikely, stimulus gives a sense of what it might mean for the australian economy and also illuminates the channels that would be at play for a smaller stimulus ( graph 5 ). 7

are stronger or weaker than a base profile. the board has consistently communicated that it is aiming to return inflation to the midpoint of the target band ( 2. 5 per cent ) in a timely manner while retaining as many of the gains in the labour market as possible. the two cases considered here do not achieve these outcomes. that is, they would not bring the economy back into balance in the second half of 2026 ; in the strong - demand scenario, inflation would remain above 2. 5 per cent, while in the weak - demand scenario it would drop below 2. 5 per cent by the end of the forecast horizon ( see solid black lines in right - hand panels of graphs 6 and 7 ). while the policy paths shown in these charts are not necessarily ones the board would follow, the two scenarios are illustrative of how the strategy may need to be adapted as conditions unfold. in the upside scenario the board may need to consider a tighter policy stance – this could be a rate hike or a longer period on hold. in the downside scenario, the board may need to consider a looser stance – for example, by bringing forward rate cuts. graph 6 graph 7 conclusion where does all this leave us? each quarter, the rba staff prepare a forecast for the economy, based on their careful assessment of the data, and past historical relationships, but acknowledging it relies on many judgments and assumptions. we select key judgments and risks to create scenarios that might differ from our central forecast. these scenarios help rba staff understand the risks and they feed into the policy advice, though they only cover a fraction of the overall uncertainty. the board evaluates this information when setting policy, focusing on the strategy ’ s robustness amid inherent risks and the delayed effects of monetary policy on the economy. we hope the scenarios we publish help financial markets and the public better understand the forecasts and policy decisions, encouraging broader debate and discussion. r e s e r v e b a n k o f au s t r a l i a endnotes * i would like to thank tim taylor, thomas cusbert and nicholas west for their assistance in writing this speech and andrew hauser, chris kent, brad jones, michael plumb, penny smith, dave jacobs and jeremy lawson for their helpful comments. see bernanke bs ( 2024 ), ‘ forecasting for monetary policy making and communication at the bank of england : a review ’, april ; australian government ( 2023 ),