The Reserve Bank of Australia is set to cut interest rates again next month as it moves to invigorate a rapidly sagging economy.
The central bank yesterday slashed its economic growth forecast from 2pc to 1.5pc over this financial year, blaming the global financial crisis for the reduction.
"Overall, the domestic growth forecasts have been revised down, reflecting the deterioration of the global outlook and price falls in commodity markets," the Reserve Bank's Statement on Monetary Policy said.
The downgrade came as new Australian Bureau of Statistics figures showed approvals for owner-occupier home loans dropped 2.7pc in September to 47,435.
It was the eighth monthly fall in a row and the lowest volume of home-loan commitments since February 2001.
While the RBA painted a grim outlook, China appeared to throw Australia a lifeline after announcing a massive four-trillion-yuan ($A850billion) economic stimulus package.
Both the Federal Government and Australian stockmarket were buoyed by the package.
The Australian sharemarket rose more than 1.3pc, lifted by mining stocks, with investors optimistic about the boost to Chinese construction activity.
Prime Minister Kevin Rudd described it as an "extraordinary" fiscal stimulus package.
"I regard that as very good news for this economy, very good news for the regional economy, very good news for the global economy, and it is certainly consistent with the many discussions that the Treasurer and myself have had with various Chinese counterparts in recent weeks."
Yesterday's RBA forecast was the third downward revision to the Australian economy in less than a week since Treasury and the IMF last week downgraded their forecasts of economic growth in Australia to 2pc and 1.8pc respectively.
In Parliament, the Government said the significant difference between the Treasury forecast and the Reserve Bank forecast could be explained by the fact that Treasury had taken the unprecedented step of factoring in future interest rate cuts.
"This is a departure from the usual assumption of unchanged interest rates, reflecting the fact that markets are forecasting a significant easing in the near term and would unrealistic not to take this into account," Mr Rudd said.
"That is why you see a difference to the approach to the calculation of the growth number."
Economists said the RBA statement continued to highlight downside risks to the economic outlook from reduced consumer and business spending and lower asset prices.
CommSec chief economist Craig James said yesterday: "The Reserve Bank is clearly laying the groundwork for more significant rate cuts.
"CommSec expects the Reserve Bank to cut the cash rate by at least 50 basis points, or half a per cent, in December."
The RBA cut the official cash rate by 75 basis points last week to a five-year low of 5.25pc, a total of 200 basis points since September and its most aggressive policy easing since the 1990s recession.
"In reviewing the stance of policy each month in the period ahead, the board will be seeking to strike the appropriate balance between avoiding an unduly sharp weakening in demand and the need for inflation to fall back to the target over a reasonable period."
Despite this weak growth profile, the RBA believes price pressures will still take time to tame.
It now expects underlying inflation will not return to within its 2-3pc target band until June 2011.
Federal Treasurer Wayne Swan also announced yesterday that he would meet US Federal Reserve chairman Ben Bernanke and US Treasury secretary Henry Paulson in Washington to discuss responses to the global crisis ahead of the G20 leaders' meeting later this week.
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