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Australia's central bank cuts GDP forecasts

Australia's central bank Friday (Aug 8) cut its growth forecasts as it reinforced a "period of stability" in interest rates and highlighted the challenges the economy faces as it moves away from mining-led expansion.

SYDNEY: Australia's central bank Friday (Aug 8) cut its growth forecasts as it reinforced a "period of stability" in interest rates and highlighted the challenges the economy faces as it moves away from mining-led expansion.

The Reserve Bank of Australia lowered its GDP forecasts for 2014 and 2015 by 25 percentage points, and said the "key uncertainties" facing the economy included when and how large the fall-off in resources investment would be.

"The key uncertainties for the domestic economy continue to be centred on the timing and extent of the decline in mining investment and how this is balanced by the expansion of resource exports and the recovery in non-mining activity," the RBA said. "Mining investment could decline more sharply than anticipated. On the other hand, it is possible that consumption and non-mining business investment could, in time, be stronger than expected."

In its quarterly Statement on Monetary Policy, the central bank projected economic growth to be about 2.5 per cent in the year to December 2014, down from 2.75 per cent forecast in May. It estimated GDP to be about 2.0 to 3.0 per cent in the year to June 2015, from the prior forecast of 2.25 to 3.25 per cent.

Near-term inflation expectations were revised lower after the government repealed carbon tax legislation. Consumer prices were tipped to rise by 2.0 per cent instead of by 2.75 per cent in the year to December 2014. The Australian dollar slipped by almost a quarter of a cent to about 92.45 US cents after the statement was released.

The updated growth forecasts came a day after official figures showed Australia's unemployment rate spiked to a 12-year high of 6.4 per cent in July, from 6.0 per cent in June. The surprise jump in the jobless rate strengthened expectations that a near-time hike in interest rates was less likely amid continued signs of weakness in the economy.

The RBA kept the cash rate on hold at a record low of 2.5 per cent on Tuesday. Interest rates have remained at 2.5 per cent since the central bank last eased monetary policy in August 2013 to boost growth in non-mining activity as the economy exits from an unprecedented resources investment boom.

The Reserve Bank said Friday that "the recent softness in some indicators has increased the uncertainty around the strength and timing of the pick-up in consumption and non-mining investment". "With only tentative signs of improvement in near-term indicators, the timing of the pick-up has been pushed out a bit further."

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