Reserve Bank Lowers Inflation Outlook

The Reserve Bank of Australia (RBA) has lowered its inflation outlook and warned Australia’s economy could be dragged down by Europe’s sovereign debt crisis.

The RBA expects underlying inflation to be around 2.5 per cent in 2012, half a percentage point lower than it forecast three months ago.

That is within the RBA’s two to three per cent medium-term target for underlying inflation, which it aims to control using the cash rate.

Underlying inflation, excluding the impact of the price on carbon, is expected to be consistent with the target for the next two years, the central bank said in its quarterly Statement on Monetary Policy, released on Friday.

The RBA warned that the largest risk in its forecasts was the sovereign debt and banking problems in Europe.