Sudden worsening in Eurozone still biggest risk to Australia

A sudden worsening of the eurozone debt crisis remains the biggest risk to Australia's economy, the Reserve Bank of Australia (RBA) warned in the minutes of its March 6 board meeting released on Tuesday. In the minutes, the RBA said sovereign debt concerns in Europe continued to weigh on the outlook, but conditions in most euro area sovereign debt markets had improved over the month and some progress had been made. The RBA also provided a reality check on Australia's exposure to Europe. "The clearest downside risk to the outlook for Australia remained a sudden worsening in the situation in Europe and its flow-on effects to the rest of the world through trade, financial and confidence channels," the RBA said in the minutes. "Members noted that a sharp slowdown, particularly in East Asia, would have significant implications for commodity prices and demand for Australian exports." The central bank said the board noted that while this downside risk could still materialize, a worst-case scenario in Europe was somewhat less likely than a few months ago. Although the RBA believes the current cash rate setting is at an appropriate level, it said in the minutes that the bank still had "ample scope" to cut the official interest rate to stimulate the economy. The RBA left the official interest rates unchanged at 4.25 percent in March for the second month in a row. It cut the cash rate twice in November and December 2011 by combined 50 basis points. "Most information thus far has indicated that weakness in parts of the economy - including manufacturing, building construction and parts of the retail sector - was being approximately balanced by the strength in the mining sector and some services industries, " the RBA minutes noted.