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Reserve Bank cuts domestic growth outlook

Source: ABC News: 07 Nov 2011

The Reserve Bank of Australia (RBA) has cut its forecast for economic growth and inflation in its latest quarterly report card.

Europe's ongoing sovereign debt crisis and the stalemate over the eurozone bailout pose the largest threat to the domestic outlook, the bank says.

In its quarterly Statement on Monetary Policy the RBA revised its expectations for domestic growth down to 2.75 per cent from 3.25 per cent this year.

Underlying inflation (excluding the carbon price) was expected to come in at 2.5 per cent in 2012, down from an earlier forecast of 3 per cent.

"The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility," the RBA said.

"A worse outcome in Europe would adversely affect the Australian economy, and underlying inflation would be likely to decline."

The central bank said the economy was growing at a "moderate pace" but highlighted its two-speed nature, with growth in the "non-mining economy" expected to remain below average.

Unemployment was expected to rise slightly due to subdued growth outside the mining sector.

Westpac chief economist Bill Evans says the report signals that the RBA no longer believes the mining boom can fuel the rest of the economy.

"The automatic assumption that mining prosperity will mean national prosperity is being questioned," Mr Evans said.

Weak conditions

While mining-related sectors would continue to enjoy robust growth, the RBA said other industries had been hit by the strong Australian dollar and changes in household spending and borrowing.

"Many households appear to be increasing their expenditure on services, rather than goods, and this is contributing to the weak conditions in parts of the retail sector," the RBA said.

Imports were an increasing contributor to domestic demand, again due to the high exchange rate and the mining boom.

CommSec economist Savanth Sebastian said the statement indicates the RBA may move to cut interest rates again - sooner, rather than later, given the turmoil in the eurozone.

"Any further rate cut is likely to be as a result of the volatility in Europe," he said.

"It is important to point out that the longer it takes to find a solution to the European debt crisis the more heightened the risks are for the global economy.

"In addition, a further rate cut would help to shore up domestic confidence and ensure that monetary policy move to a more neutral setting."

Looking ahead, the bank expected slightly stronger growth of 3 to 3.5 per cent in 2012.

Budget impact

Treasurer Wayne Swan says the Reserve Bank economic update is a reminder that Australia is not immune from the European debt crisis.

Mr Swan says the economic instability will affect Australia and the Government's budget.

"It certainly has an impact on confidence," he said.

"It certainly affects the hiring intentions of employers, and of course a higher dollar impacts on trade-exposed sectors.

"So we can expect to see an impact on budget revenues, but the Government is determined to bring the budget back to surplus in 2012-13."

ABC News

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