The RBA hints that interest rates will remain on hold as forecasts inflation of 2.75pc until the end of 2011 / File

In its quarterly statement of monetary policy, the central bank said it expects Australia's economy to have grown by three per cent over the year to June 2010, before picking up pace to grow at four per cent in the year to December 2012.

The statement points to an extension of the current pause in interest rate rises, with underlying inflation forecast to stay at 2.75 per cent through to the end of 2011 before edging up to three per cent in 2012.

"The main downside risk on the domestic front is that the forecast pick up in private demand occurs more slowly than expected and does not fully offset the contraction in public spending over the next few quarters,'' the statement said.

"Fiscal policy will be subtracting from growth in the period ahead.

"Given the uncertainty about the timing of a number of planned large investment projects in the resource sector, it is possible overall growth over the next few quarters will be weaker than in the central forecast.''

But the central bank also acknowledged an upside risk to its forecasts that largely depend on when major mining projects get under way.

"It is also possible that domestic private demand could be stronger than forecast, particularly if firms in the mining sector attempt to push ahead with investment more rapidly than assumed in the central forecasts,'' the statement said.

"That would result in capacity pressures in the construction sector and the broader economy.''

This factor, together with stronger household spending, low levels of unemployment and ongoing strong consumer confidence could see inflation rise more rapidly, the bank said.

Unemployment was at 5.1 per cent in June, according to official data, a fraction above the five per cent mark referred to by economists as "total employment,'' widely seen as the benchmark below which wage inflation becomes more likely.

Meanwhile, the central bank's forecast for inflation was largely unchanged from the May statement, when they predicted headline inflation to be at 3.25 per cent by December 2010.

Underlying inflation, meanwhile, is not expected to reach the upper end of the bank's two to three per cent target band for inflation until the June quarter of 2012, the statement said.

There was speculation higher than expected inflation for the June quarter would cause the central bank to lift the cash rate at its August board meeting.

However, official data released last week showed underlying inflation was at a three year low of 2.7 per cent.

The central bank on Tuesday opted to leave the cash rate steady at 4.5 per cent, a decision widely expected by market forecasters after the June quarter consumer price index (CPI) was released.

The central bank has also revised its forecast pace of decline for the terms of trade.

In the May statement, the RBA predicted terms of trade would ease gradually in the lead up to 2012.

It now says it expects the terms of trade to ease more rapidly but remain at historically high levels.

The Australian Bureau of Statistics is expected to publish its July Labour Force data on Thursday, August 12 and its September quarter consumer price index in late October.