The Reserve Bank of Australia (RBA) expects the unemployment rate will increase and can't totally rule out recession, but says it is unlikely.

RBA Governor Glenn Stevens said it would take something "quite surprising" to reverse a likely downward trend in interest rates.

Mr Stevens and fellow central bank officials faced a three-hour grilling by federal parliament's House Economics Committee in Melbourne, the RBA's twice-yearly appearance to a public hearing.

The questioning was timely given the RBA cut its key cash rate last week - to 7.0 per cent from 7.25 per cent - the first reduction in nearly seven years.

The decision followed 12 consecutive rate increases from May 2002, including increases in February and March this year.

Mr Stevens told the committee the central bank had moved from a stance of whether it had done enough to curb inflation to one in which the question is "do we hold here or do we go down a bit more?".

"Unless something quite surprising happens, it seems to me unlikely that we will be reversing course up again in the near term."

He noted financial markets had priced in some further reductions in the cash rate over time.

"I don't have any particular agenda today to either persuade them from that or encourage them any further.

"We will assess the situation month by month."

The slowdown in domestic demand, and falling oil and food prices, should bring inflation down over time, but Mr Stevens still expects the consumer price index to strike 5.0 per cent when the September quarter inflation report is released next month.

The bank expects there will be signs of inflation retreating next year and is forecasting the CPI to return to its two to three per cent inflation target by 2010.

It is also sticking to an economic growth forecast of just two per cent by year-end, down from the 4.3 per cent rate seen in December 2007.

But there will be job losses as a result of the slowdown and similar to that seen in 2001.

"Unemployment rose a percentage point ... that sort of episode is what we're experiencing now," he said.

"It's going to rise a bit in the next year to 18 months."

He also could not rule out the economy falling into recession.

"Is there a zero risk of recession? No, it's not zero but the most likely one is the one in the published outlook," he said.

"We're in slow growth-like period ... I don't think it would be honest to deny there are some probabilities of that but the most likely outcome is the one we put out over the last six months."

Mr Stevens also defended the central bank's decision to raise rates in February and March given the information it had at the time, and given that it is still expecting the consumer price index to rise further.

"I think the likelihood that we were going to credibly sit through one bad CPI, then another, then a third, and there is actually a fourth coming that still won't look too good, and not respond at all, I think that was pretty unlikely," Mr Stevens said.

"When inflation is rising like that you have to respond."