The Reserve Bank of Australia, or RBA, on Tuesday decided to retain the cash rate at 4.75 percent, as expected, and said the economic growth through 2011 may not be as strong as earlier thought.

At the meeting, the Monetary Policy Board judged that the current "mildly restrictive" stance of monetary policy remained appropriate. In future meetings, the board will continue to assess carefully the evolving outlook for growth and inflation, the bank said in a statement.

The central bank has been keeping the rate on hold since November last year, when it was raised by 25 basis points to the current level.

Regarding the price developments, the RBA said that year-ended inflation is likely to remain elevated in the near-term due to the extreme weather events earlier in the year.

However, as the temporary price shocks dissipate, inflation is expected to be close to target over the next 12 months. In underlying terms, inflation has been in the bottom half of the target range, though a gradual increase is expected over time, the board said.

Earlier, the central bank had indicated that higher rates are needed at some point to keep inflation within the 2-3 percent target, and most economists now expect the RBA to resume the tightening cycle in August.

The bank said that over the medium term, overall growth is still likely to be "at trend" or "higher", if the world economy grows as expected. But the monetary board assessed that growth through 2011 is now unlikely to be as strong as estimated earlier.

However, the recovery of the economy will boost output over the months ahead, and there will also be a mild boost to demand from the broader rebuilding efforts as they get under way.

The bank observed that a gradual recovery from the floods and cyclones over the summer is taking place, though the resumption of coal production in flooded mines continues to proceed more slowly than initially expected.

The Australian economy suffered its steepest contraction in 20 years in the March quarter of 2011 as Queensland floods adversely affected coal mining and exports.

The seasonally adjusted gross domestic product shrunk 1.2 percent sequentially during the three months ended March after a 0.8 percent expansion in the fourth quarter.

Separately, survey results by the Australian Industry Group, or AIG, showed today that the service sector contracted in June, despite an increase in new orders.

According to AIG Chief Executive Heather Ridout, the overall flatness of the services sector is further evidence of the lopsided nature of the domestic economy and points to the vulnerability of the sector to further interest rate rises.

According to figures released by the Australian Bureau of Statistics today, the trade surplus rose to a seven-month high in May, driven by strong exports and a recovery in mining.

Referring to the global economy, the bank said the supply-chain disruptions from the Japanese earthquake and the dampening effects of high commodity prices on income and spending in major countries have both contributed to a slowdown in world economy.

The central bank also raised concerns over the uncertainty and volatility in financial markets over recent months, fueled by the banking and sovereign debt problems in Europe.

RTTNews