Outlook for China's economy is a key risk, RBA says

The Aussie was knocked lower overnight following the release of the Reserve Bank of Australia's quarterly Statement on Monetary Policy.

Rate-setters in Sydney said "the outlook for domestic cost pressures is a key source of uncertainty".

Policy-makers also called attention to two of the recent bugbears for financial markets, the question marks surrounding the stabilisation seen in China's economy and still-low inflation expectations.

As regards the former, the RBA said that the outlook for the largest economy in its part of the world was also a "key source of uncertainty for the forecasts".

"One risk is that the pursuit of the authorities’ near-term growth targets is likely to increase already elevated levels of debt and could potentially delay addressing the problem of excess capacity in the manufacturing and resources sectors," the RBA said in a statement.

Its view of growth in the world's major economies was also mixed, with growth in Japan described as "weak" and "easing" in the US, although it continued at an above-trend rate in the euro area.

Furthermore, while there had been further improvements in labour market conditions across all three economies, inflation in the major advanced economies remained below central banks’ targets and inflation expectations had declined, the RBA said.

China's demand for steel was also still seen declining over the "next couple of years", alongside an "substantial" amount of new iron-ore supplies expected to reach the market, although prices for liquefied natural gas were now expected to be higher helping to keep Australia's terms of trade around current levels by the end of the central bank's forecasting period.

As of 08:10 BST the Australian dollar was 0.98% lower versus its US counterpart at 0.7392.