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Australia's RBA sees better economic conditions, cuts inflation forecast

A man and a women walk into the Reserve Bank of Australia headquarters in Sydney, Australia.
Mark Metcalfe | Getty Images
A man and a women walk into the Reserve Bank of Australia headquarters in Sydney, Australia.

Australia's central bank has become more confident about the outlook for economic growth, while a surprisingly subdued pace of inflation offered room for interest rates to be cut again if needed.

In its quarterly policy outlook, the Reserve Bank of Australia (RBA) forecast that underlying inflation would remain at the floor of its 2 to 3 percent target band for most of next year, a marked step down from its August prediction.

"The outlook for inflation may afford scope for further easing of policy should that be appropriate," the RBA said in its 72-page report.

Yet earlier this week the central bank skipped on a chance to cut at its November policy meeting, leading investors to lengthen the odds on a move in December as well.

"The Board judged the prospects for an improvement in economic conditions had firmed a little over recent months and that it was appropriate to leave the cash rate unchanged," the RBA said in its Friday report.

In support, the bank pointed to a range of improving indicators from employment to vacancies, business surveys and trade data. Rates have been at 2 percent since the last easing in May.

Underlying inflation was now seen around 2 percent for most of next year, down from 2.5 percent previously, and then to rise to around the middle of the 2 to 3 percent target range.

The economy was expected to be growing between 2.5 and 3.5 percent by the end of 2016, and by 3 to 4 percent by the end of 2017. The latter was slightly lower than projected in the previous report largely due to a slower start up in liquefied natural gas projects, the RBA said.

Mining investment was still expected to fall sharply after a decade of madcap expansion and there was little sign as yet of a material pick up in other sectors.

Resource exports were still expected to be a major driver of growth while a lower Australian dollar had been a notable boon for net service exports.

Read MoreRBA holds rates at record-low 2 percent but adds easing bias

The bank was upbeat on the labor market saying employment growth was expected to be a bit stronger than first assumed. The jobless rate was forecast to remain in a tight range of 6.0 to 6.25 percent over the next year, before falling gradually.

However, it highlighted China, and Asia in general, as a key source of uncertainty with growth in the region now likely to be slower than first thought.

"Changes in the outlook for Chinese economic activity could have noticeable effects on its trading partners in the region and on commodity prices," the RBA warned.