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RBA trims Australia's growth outlook

Reserve Bank of Australia
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Reserve Bank of Australia

Australia's central bank softened its economic outlook for 2016 to reflect slower population growth and said the effects of this year's double interest rate cuts were still working through, suggesting it remained in a wait-and-see mode.

In its 72-page quarterly report, the Reserve Bank of Australia (RBA) said there is a "reasonable chance" for the local dollar to fall further once the Federal Reserve started to tighten monetary policy this year.

However, it omitted a previous prediction that a further drop in the currency was both likely and necessary.

The RBA cut its cash rate in February and May by a quarter point each to a record low 2.0 percent, but appears reluctant to cut further for fear of overstimulating the housing market.

"Since the May statement, the Board has judged that an accommodative stance of monetary policy remains appropriate," the RBA said.

"The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the inflation target over time."

The central bank kept this year's growth forecast at 2.5 percent but trimmed its 2016 figures to 2.5-3.5 percent, from 2.75-3.75 percent. It expected a gradual acceleration to 3.0-4.5 percent by the end of 2017.

The downward revision largely reflected slower population growth which was now expected to be an annual 1.5 percent over the next couple of years, compared to 1.75 percent.

Read MoreAustralian dollar rallies as RBA keeps rates steady at 2.0%

The RBA saw underlying inflation remaining well within its 2-3 percent target range for the foreseeable future.

Sluggish business investment and the fall in mining investment remained a key drag, but the RBA sounded more positive about the labour market, business conditions and a lower exchange rate.

Over the past year, the Aussie dollar has fallen by around 15 percent on a trade-weighted basis.

"There are increasing signs that the depreciation of the exchange rate is providing additional support to demand for domestically produced goods and services, which should in time lead to more investment," it said.

"The further depreciation of the exchange rate will provide some assistance with the adjustment of the economy to the lower terms of trade," it said.

On China, Australia's biggest export market, the RBA said the risks remained tilted to the downside, citing recent volatility in the Chinese stock market has clouded the outlook for the world's second biggest economy.