The Reserve Bank of Australia has slashed its gross domestic product forecast for the 2011-12 financial year by one percentage point.


The readjustment of its growth forecasts has seen expected economic growth fall to 3.25 per cent from 4.25 per cent. The RBA has said that the substantial fall in forecasted growth is due to a larger than expected fall in coal output coupled with a slower than expected recovery of exports. Surprisingly weak consumer spending, shown in a 50-year low slump in retail spending, is also a key factor in the slump in growth.


However, the RBA has announced that inflation is forecasted to peak above the target band of 3.25 per cent by the end of the year, up by 0.25 from the May forecast of 3 per cent.


The increase in expected inflation rates comes as financial markets are pricing in at least one interest rate cut by the end of the year.


The RBA has attributed increased domestic market volatility and economic cooldown to the prevailing international economic uncertainty.


“While these forecasts represent the bank’s central scenario, at the global level risks to economic activity are weighted to the downside,” the RBA said in a statement.


“There remains a possibility that the sovereign debt problems in Europe and the United States play out in a disorderly and disruptive manner, and that this leads to a marked rise in global risk aversion and uncertainty.