Australia's Reserve Bank has expressed deep concern about Australia's economic outlook, presenting forecasts that suggest it might have lifted interest rates too high.
Its latest quarterly statement predicts that economic growth is about to slow and that unemployment will climb to 6pc.
The Reserve Bank warns that, while these are its central forecasts, and headline inflation is now expected to peak at 5pc in December, any further deterioration in the global outlook could lead to a "significant deterioration" beyond those forecasts.
The RBA predicts that Australia's annual rate of jobs growth, at present 2.3pc, will slow to three-quarters of 1pc almost straight away.
The forecast implies a jump in unemployment from 4.3pc to 6pc by the end of next year.
Australia's rate of economic growth, at present 3.6pc, is forecast to slow to 2pc by the end of this year, with about half of that coming from the mining and agricultural sectors, implying a paltry 1pc growth rate in the rest of the economy.
Westpac chief economist Bill Evans said the Reserve Bank seemed to be "shocked" by the severity of the slowdown that it had helped engineer.
"It's worried about the global outlook and concerned that that financial turmoil could exacerbate the slowdown," he said.
The RBA said some of the downward revision in its forecasts was due to the explosion at Western Australia's Varanus Island gas plant, which had cut that state's gas output by one-third and would knock 0.25 of a percentage point off national economic growth.
But it said there had also been "a sharp slowing in credit expansion to both households and businesses" as private lenders had pushed up their interest rates by more than it did and toughened their lending standards.
Housing loan approvals had fallen 20pc since the start of the year and business loans were growing at an annualised rate of just 8pc — well down on the 17pc growth rate at the end of last year.
The RBA said that retail spending was falling in real terms, as were sales of motor cars and consumer and business confidence.
Lending finance figures released yesterday posted their biggest slide in 16 years.
Total lending slumped 13.3pc in the year to May, the biggest annual decline since January 1992 when Australia was emerging from recession.
The bank raised its inflation forecast, saying it now expects the headline rate to peak at 5pc in December before easing to 3pc by mid-2010.
But this would not stop it cutting interest rates, saying that, so long as the economy remained subdued, the scope for rate cuts was "increasing".
The bank is expected to cut its cash rate by 0.25pc when its board meets on September 2, the first such cut for seven years.
A member of the Reserve Bank board, former Woolworths chief Roger Corbett, said that Australia was "resilient" and had a strong, broad base.
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