Australia's central bank on Friday warned that financial turmoil in Europe could drag the country's resource-led economy lower, as it cut forecasts for domestic growth and inflation.

The Reserve Bank of Australia (RBA) said it had concerns about the situation in Europe as leaders of the world's top economies met for a G20 summit in Cannes, France.

In a monetary policy statement finalised on Thursday, Australia's central bank lowered its average economic growth forecast for the 2011/2012 fiscal year to 3.25 percent from 4.0 percent. The new estimate was officially released on Friday.

"The risks (to the forecast) continue to be tilted to the downside, with a very disruptive outcome in Europe still possible," it said.

The change came as Greece's prime minister on Thursday backed away from his controversial plan for a national vote on a eurozone rescue package which included a massive bailout for the debt-ridden nation.

The RBA also lowered its inflation forecast to reflect the revised growth figures. In underlying terms, inflation is expected to be around 2.5 percent in 2012, 50 basis points lower than the bank's August forecast.

It said the revised forecasts were contingent on European leaders acting to fix the region's sovereign debt and banking problems.

"The Bank's central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility," it said.

"A worse outcome in Europe would adversely affect the Australian economy, and underlying inflation would be likely to decline."

The RBA said while the mining-related parts of the Australian economy were experiencing solid growth, with unprecedented Asian demand for minerals, the near-term outlook for the rest of the economy was subdued.

On Tuesday, the central bank lowered interest rates by 25 basis points to 4.50 percent, citing easing inflationary pressures, but later warned the situation could worsen if Europe was plunged into a "deep recession".

"Given the strong trade links with Asia, it is likely that Australia would be less directly affected than some other countries by a deterioration in Europe, although the economy would still be affected through falls in asset prices and weaker household and business confidence," it said.

Treasurer Wayne Swan said the RBA statement confirmed economic instability was impacting global growth and "therefore impacting on Australian growth".

"What we are seeing in the global economy is instability," he said. "We've got two of the very big economic engines misfiring in the global economy in terms of Europe and also in terms of the United States."

channelnewsasia.com