Australia's central bank today trimmed its growth and inflation forecasts for the first half of 2012 and signalled it has scope to cut interest rates amid uncertainty about Europe's debt crisis.
In its quarterly statement on monetary policy, the Reserve Bank of Australia said economic growth in the year to the end of June was expected to be 3.5%, from the 4% it forecast in November.
It left its outlook for December 2012 gross domestic product unchanged at 3-3.5%. Underlying inflation was forecast to be at 2.25% in June compared with its previous estimate of 2.5%, within its 2-3% target band. Its December inflation outlook was unchanged at 2.75%.
The RBA said uncertainty about Europe's debt crisis had weighed on domestic household and business confidence and while ongoing strong growth was expected in the mining sector, other parts of the economy would continue to struggle.
"Growth outside the mining sector is expected to remain below trend over the forecast period," it said.
"In the building industry, conditions remain weak in both the office and home-building sectors. The high level of the exchange rate is also weighing on trade-exposed sectors including manufacturing, tourism and education," it added.
The bank said the greatest risks to domestic growth came from overseas, particularly Europe and the possibility of recession. "If this risk did eventuate it would lead to a severe recession in Europe, which would spill over to the rest of the the world through trade, financial and confidence linkages," it said.
But after surprising the market by leaving official interest rates steady at 4.25% earlier this week, the bank said it has policy ammunition to respond if domestic conditions deteriorate. "The current inflation outlook would, however, provide scope for easier monetary policy should demand conditions weaken materially," it said.
