That is the view of the Reserve Bank after officials appeared before a senate estimates hearing on Thursday, where they said a decline in momentum in economic growth was not a surprise.
GDP grew at 0.3 per cent in the March quarter, down from 0.9 per cent in the three months ended December, the Australian Bureau of Statistics reported on Wednesday.
While the annual rate held at 2.5 per cent, the central bank's chief economist Sarah Hunter expects annual GDP growth to slow to about 1.4 per cent by June 2027.
"We think that the economy is going to go into a bit of a slowdown now," Dr Hunter said.
"The data yesterday was broadly in line with what we were expecting."
Higher interest rates would keep the economy growing below its supply capacity - essentially the speed limit it can expand at without pushing up inflation - until 2028, she said.
As the output gap closed, inflation would come back toward the RBA's target of 2.5 per cent, Dr Hunter said.
While inflation remained above the RBA's target, the economy was still expected to grow, albeit modestly, and it was not accurate to use the term stagflation in the current circumstances, governor Michele Bullock said.
"I think we're in a supply shock," she told the hearing.
"Stagflation is ... about a prolonged period of high inflation and very poor growth and poor employment outcomes. We're not in such a situation."
Ms Bullock downplayed the impact of changes in the federal budget, saying it did not change the RBA's assessment of inflation compared to the previous fiscal update in December.
Treasury officials said the controversial tax changes would have little impact on economic growth or productivity.
The changes to negative gearing, the capital gains tax and trusts, which passed the lower house on Thursday, "did not have a significant impact (to GDP growth) in the near term", said deputy secretary for macroeconomics Angelia Grant.
At best, the budget firmed up Treasury's confidence in its existing assumptions for productivity growth.
"There isn't a shift in the medium term parameters as a result of the tax package," Dr Grant said.
Treasury secretary Jenny Wilkinson said other changes in the budget - including to the research and development tax incentive, loss carry-back provisions for businesses and thresholds for venture capital investment - would boost productivity.
Productivity - as measured by GDP per hour worked - fell 0.6 per cent in the March quarter.Â
Compared to Treasury forecasts of a two per cent drag on home prices, Commonwealth Bank senior economists Trent Saunders and Ashwin Clarke estimated the budget will weigh on home prices by five per cent in 2026.
Global uncertainty and rising interest rates were already depressing the housing market, but the quick response to the tax changes suggested the near-term impact would be sharper than expected, the duo said in a research note on Wednesday.
Ms Bullock said the Reserve Bank was unbothered about the risk first home buyers on five per cent deposits were left with debt bills if house prices fall and they were forced to sell up at a loss.
Practically no one was in negative equity - when the amount they owe on a home loan is greater than its value - she said.
"Negative equity matters if people get into trouble with their loans, and then they have to sell their homes to meet that," Ms Bullock said.
"That's why a strong employment market at the moment is really important."
Housing Minister Clare O'Neil refused to say whether it was a good or bad thing that home prices were going down.
"We can see that 400 per cent price growth that has occurred over a 25-year period is not sustainable for our country," she said.
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