Four days after it retained the overnight cash rate at 4.25
per cent, the Reserve Bank of Australia (
) lowered on Friday its inflation and growth forecast for the
first six months of 2012.
The Australian central bank reduced inflation outlook to 2.25
per cent from 2.5 per cent three months ago and gross domestic
) growth rate to 3.5 per cent from 4 per cent.
The RBA explained the cuts to uncertainty over Europe's debt
crisis which is expected to impact domestic household and
"The major uncertainty regarding these forecasts stems from
developments in Europe, where there is still some possibility of
an intensification of the sovereign debt problems. While the
likelihood of such an outcome seems to have lessened a little
recently, if it did occur, Europe would be likely to experience a
severe recession with spillover effects to the rest of the world
through trade, financial and confidence linkages," the RBA said
in its quarterly report.
"Australia is better placed than many other countries to deal
with the downside risk, given the scope to adjust macroeconomic
policy, the flexible exchange rate and the strong banking system.
Nevertheless, if this downside risk did eventuate, growth in
Australia would be weaker than in the bank's central scenario,"
the RBA explained.
The central bank pointed out that despite the strong growth in
Australia's mining sector, other parts of the economy will be
affected by the strong currency and would continue to struggle.
Among the sectors mentioned by the RBA to be affected by the high
dollar are construction, manufacturing, tourism and
At the same time, the RBA defended its Tuesday decision to
retain the key lending rate. The bank cited two cash rate cuts
made in November and December 2011 which were driven by the
improved inflation outlook. It said the underlying inflation
would provide scope for the central bank to ease monetary policy
if demand conditions would weaken materially.
RBA said it would continue to monitor information on economic
and financial conditions in the coming months and adjust the
overnight cash rate "as necessary to foster sustainable growth
and low inflation."