The Reserve Bank of Australia downgraded its growth outlook but raised inflation forecast, citing further weakness in the Australian dollar.
In the quarterly Statement On Monetary Policy released Friday, the bank estimated average growth to range between 2 percent and 3 percent in 2016, down from a range of 2.5-3.5 percent projected in May. It is expected to improve to 3-4.5 percent by December 2017.
The risks to the outlook for global growth appear broadly balanced, but risks in China remain somewhat tilted to the downside, the RBA noted.
The recent volatility in the Chinese equity market and the government's policy response have both increased the general level of uncertainty regarding the economic outlook, the bank said.
Inflation forecast was revised up a little since May, primarily because the Australian dollar has depreciated further. Underlying inflation is seen between 2 percent and 3 percent until December 2017. Domestic cost pressures are expected to remain well contained.
The Federal Reserve is likely to raise its policy before the end of the year. The RBA sees a "reasonable" chance that the Australian dollar will depreciate further once that tightening commences.
The bank observed that the further depreciation of the Australian dollar will help the economy to adjust with the lower terms of trade.
The RBA downgraded its forecast for terms of trade by 4 percent since May, citing declines in commodity prices and subdued outlook for Chinese steel demand on iron ore prices.
The bank estimates a lower rate of population growth because of lower net immigration. The assumption of lower population growth leads to lower growth for some elements of expenditure, most notably consumption and non-mining business investment.
The jobless rate is expected to be lower than the bank's previous forecast. The unemployment rate is likely to peak below 6.5 percent.
"The unemployment rate is now forecast to remain little changed over the next 18 months or so from recent levels, before declining over 2017."
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