Ahead of the budget surplus that Prime Minister Julia Gillard said she will adhere to in the May 8 budget presentation, the Reserve Bank of Australia (RBA) painted a subdued pace of the domestic economy for much of 2012 on its quarterly policy advisory.

The RBA said that global economic growth could be hampered by the mild recession that economist said will infect the general European economies this year and the despite the slight upward trajectory of the U.S. economy, the local environment will be likely affected by some challenges.

Consequently, the domestic expansion will likely settle at 3 per cent this year, a projection that veers away from the 3.5 per cent that the central bank had flagged earlier in February.

The downgrade, according to the RBA, was based on prevailing perception that Australia's inflation levels will ease, with the central bank looking at around 2.25 per cent as the dominant underlying inflation for the better part of 2012, coming from its earlier forecast of 2.75 per cent.

Consumer prices will most likely jump only by 2.5 per cent, the RBA said, an improvement from the 3 per cent that the banks said will transpire this year.

Its downward revision for the country's economic pace this year is backed by the likelihood that the anticipated turnaround in the housing sector will not happen too soon as expected by many economists.

"Labor market conditions have continued to be on the soft side to date, with large increases in employment in mining and some service industries roughly offset by declines in the manufacturing, hospitality and retail sectors," the RBA added on its quarterly monetary address.

The new forecasts, however, hinge on the present national borrowing cost that the RBA set at 3.75 per cent this week following months of allowing the cash rate to remain at 4.25 per cent.

The 50-basis-point reduction rolled out by the central bank on Tuesday reflected the biggest cut imposed by the RBA since 2009 but Australia remains carrying the one of the highest interest rates among the developed economies.

To further stir growth in the country's key industries, economists have predicted that another 25-basis-point will be chopped off from the benchmark rate in June, and would likely fuel drastic revisions on the overall direction of the local economy.

While noting that the controlled cooling down of the Chinese economy this year and the sustained difficulties in Europe could prompt the RBA board to rethink its general assessment of the Australian situation, interventions set by policy managers in the eurozone have somewhat eased down the pressures.

But the specific situations in many European economies remain fragile, the central bank said.

Despite the downgrade, Federal Treasurer Wayne Swan pointed to the substantial growth forecasts that the RBA has indicated on its statement, which he added were in synch with the numbers that the government has been harping about.

"We have the same view that there are challenges in sections of our economy, but the Reserve Bank in term of its forecasts for 2012-2013, forecasts similar to ours, and which we are basing our budget," Mr Swan told reporters in Canberra on Friday.

The Treasurer reiterated too his commitment to return the national budget to surplus, a move that he characterised as both important and difficult.

While the federal government will have to save up, belt-tightening measures will be observed and this will definitely hit on specific federal services and functions, Mr Swan conceded.

The upside, he stressed, "is really important ... and it is not just some remote economic objective, it actually matters around the kitchen table."

More so, the surplus will crate more room for the RBA to issue substantial cutbacks on the cash rate like "when rates come down as they did this week by 50 basis points," Mr Swan said.