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Australia's central bank hacks growth and inflation forecasts

AUSTRALIA'S central bank yesterday slashed its growth and inflation forecasts while warning that the unemployment rate will rise as shrinking global demand for mineral and energy exports undermines the national economy.

The Reserve Bank of Australia said in its latest quarterly statement that it expects gross domestic product growth to almost stall, slipping to a pace of 0.25 percent in the 12 months through June, before improving slightly to 0.5 percent in the year ending December.

The forecasts are a major downward revision from the bank's November projections of 1.5 percent growth for the current fiscal year through June and 1.75 percent for the calendar year.

The International Monetary Fund had until last month predicted that Australia would be among the few developed countries to avoid recession.

Prime Minister Kevin Rudd used the worsening outlook to urge opposition law makers to support a A$42-billion (US$27 billion) government stimulus package in the Senate next week.

The central bank said interest rate cuts since September, which have lowered the benchmark cash rate to 3.25 percent -- the equivalent of a 45-year low -- and the government's stimulus package should help cushion the economy.

Policy combination

"While the international situation is likely to remain difficult for some time, the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad," the central bank said.

Commonwealth Bank of Australia chief economist Michael Blythe said the sharp cuts to growth forecasts signaled the bank would lower rates by half a percentage point in April to a record low of 2.75 percent.

"It's clearly a very weak profile" for growth, Blythe said.

On inflation, the central bank has revised down its forecast for the June quarter from 3 percent to 1.75 percent, due in part to lower oil and commodity prices.

"The international situation has deteriorated markedly over the past few months, and this is making for a very much more difficult environment for growth in the Australian economy," the central bank said.


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