In a more straightforward and realistic stance, Australia's central bank has slashed down its economic growth forecast for the country as the imminent play of global market forces turned for a more shaky turn during the week.

After Treasurer Wayne Swan tried to calm the restive markets with the assurance that the Australian economy is more fundamentally resilient, the Reserve Bank announced that external and internal market forces will hinder the country's full economic recovery.

"Conditions are expected to remain very strong in the mining industry, as well as those parts of the economy benefitting from high rates of resource-sector investment," the central bank said today in its quarterly monetary policy statement. "In other sectors, the high exchange rate and subdued levels of retail spending mean that the trading environment is likely to remain difficult."

The RBA forecast growth in 2011 will average 2 percent, down from its May 6 estimate of 3.25 percent. In 2012, gross domestic product will accelerate 4.5 percent, stronger than the prior estimate for a 4.25 percent expansion.

Inflation Estimates Revised Upwards

Consumer prices will rise 3.5 percent in the year through to the final quarter of 2011, from a previous prediction of 3.25 percent, and core inflation will quicken to 3.25 percent from 3 percent, it said. The RBA said underlying inflation will remain "relatively high" in 2012 and 2013.

RBA Governor Glenn Stevens on Tuesday held the overnight cash rate target at 4.75 percent for an eighth straight meeting, saying "the board remains concerned about the medium-term outlook for inflation".

His decision not to raise the developed world's highest rates reflected concern about slowdowns in the US and China, and Europe's debt crisis. He cited "the acute sense of uncertainty" in financial markets as a key factor for inaction, a line that was repeated in today's report.

"In setting monetary policy over the months ahead, the board will continue to look through the volatility in inflation resulting from the natural disasters at the start of the year, as well as any once-off effects from the introduction of a price on carbon," the central bank said today. "In what is a challenging environment, the board is committed to ensuring that inflation remains consistent with" its 2 percent to 3 percent target, it said.

The RBA, in revised forecasts released today, said the cash rate is assumed to be unchanged over the forecast period, compared with "the technical assumption in May of a 50 basis points rise by mid-2013".

A report on July 27 showed the central bank's two preferred measures of annual inflation accelerated to 2.7 percent in the second quarter, compared with a gain of about 2.3 percent in the first quarter. In today's statement, the RBA also predicted the carbon price to add 0.7 percent "to the general price level".

US slowdown

Clouding the outlook is concern that the US economy has yet to regain the ground it lost during the recession. GDP expanded at a 1.3 percent annual rate in the second quarter, after a 0.4 percent pace in the prior period, the worst six months since the recovery began in June 2009, Commerce Department figures showed July 29.

In Europe, Moody's Investors Service put Spain's Aa2 rating on review for a possible cut on July 29, citing funding pressures. That followed a similar step for Italy on June 17. Ten-year bond yields for both nations approached euro-era records last week as the region's officials failed to convince investors they would halt the spread of the debt crisis after arranging a so-called selective default for Greece.

The central bank said in the statement that global risks to its central economic scenario are "weighted to the downside".

"There remains a possibility that the sovereign debt problems in Europe and the United States play out in a disorderly and disruptive manner, and that this leads to a marked rise in global risk aversion and uncertainty," the RBA said today. "While the exposures in the financial system are better understood than they were in 2008, the scope for easing monetary and fiscal policies in most major economies is very limited."

Rate outlook

Reflecting that, interbank cash-rate futures show traders are betting there is a 100 percent chance Stevens will cut rates by 75 basis points by December. The Australian dollar, which reached $US1.1081 on July 27, the highest level since it was freely floated in 1983, was recently at $US1.0450.

The central bank predicts Australia's unemployment rate will remain about 5 percent before declining a little before the end of the forecast period. The nation's statistics bureau plans to release a report on July employment on Aug. 11.

Job growth has been fueled by a mining investment boom driven by demand for iron ore, liquefied natural gas and coal from China and India that has boosted commodity prices.

Mining boom

"Mining investment, as a share of GDP, is already at historically high levels and is expected to increase further as large expansions take place in the LNG, iron ore and coal sectors," the central bank said today.

Private reports this week showed manufacturing slumped to a two-year low last month and sales of new homes fell the most in five years. Government reports showed residential-building permits in June dropped more than economists forecast and house prices fell from April through June for the third quarter in the past year.

Australia faces a 30 percent chance of a recession in 2012 if employment growth stalls amid a widening of the gap between the mining industry and the rest of the economy, Morgan Stanley analysts wrote in a research note this week. RBA Governor Glenn Stevens on Tuesday held the overnight cash rate target at 4.75 percent for an eighth straight meeting, saying "the board remains concerned about the medium-term outlook for inflation".

His decision not to raise the developed world's highest rates reflected concern about slowdowns in the US and China, and Europe's debt crisis. He cited "the acute sense of uncertainty" in financial markets as a key factor for inaction, a line that was repeated on Friday's report. With reports from Bloomberg