AFP

SYDNEY AUSTRALIA’S central bank on Friday trimmed its growth and inflation forecasts for the year to June and signalled it has leeway to cut interest rates amid uncertainty over Europe’s debt crisis.

In its quarterly statement on monetary policy, the Reserve Bank of Australia (RBA) said economic growth in the year to June was expected to be 3.5 percent, down from the 4 percent it forecast in November.

The bank left its outlook for gross domestic product in the 2012 calendar year unchanged at 3.0-3.5 percent.

Underlying inflation was forecast to be at 2.25 percent in the 12 months to June compared with its previous estimate of 2.5 percent, within the bank’s 2-3 percent target band.

The RBA also kept its inflation prediction for the year to December at 2.75 percent.

The bank said uncertainty about Europe’s debt crisis had weighed on household and business confidence and while ongoing strong growth was expected in the mining sector, other parts of the economy would continue to struggle.

“Growth outside the mining sector is expected to remain below trend over the forecast period,” it said.

“In the building industry, conditions remain weak in both the office and homebuilding sectors. The high level of the exchange rate is also weighing on tradeexposed sectors including manufacturing, tourism and education.” The bank said the greatest risks to domestic growth came from overseas, particularly Europe and the possibility of a global recession.

“If this risk did eventuate it would lead to a severe recession in Europe, which would spill over to the rest of the the world through trade, financial and confidence linkages,” it said.

But after surprising the market by leaving official interest rates steady at 4.25 percent Tuesday, the bank said it has policy ammunition to respond if domestic conditions deteriorate.

“The current inflation outlook would, however, provide scope for easier monetary policy should demand conditions weaken materially,” it said.

Treasurer Wayne Swan said that despite the global financial turmoil the statement showed that “our economic fundamentals are absolutely rock solid”.

“We know there are strong global headwinds in the global economy, and that does produce pressures in our economy, particularly the pressures which flow through to our economy from a stronger dollar,” Swan told reporters.

“The message from the RBA today is a reminder to all of the doomsayers and naysayers that we do have a strong economy.”