The Reserve Bank of Australia has not ruled out the possibility of more cash rate cuts, but the central bank is hoping a much lower Australian dollar will save it from that decision.
The RBA has left the cash rate unchanged at a record of 2.5 per cent since cutting it from 2.75 per cent at its August meeting.
"It was appropriate to hold the cash rate steady but not close off the possibility of reducing it further should that be needed to support economic activity," the RBA said in its quarterly statement on monetary policy (SOMP), on Friday.
The RBA has cut its economic growth forecast for 2014 by half of a percentage point to somewhere between two and three per cent.
Growth in non-mining parts of the economy failing to make up for the quicker fall in mining investment is the main reason for the downgrade.
Commodity prices have fallen but the Australian dollar is not falling at a similar rate and the RBA says that is not helping the mining and resources sector.
"Based on company statements and the Bank's liaison, mining investment looks like it might decline more than was previously anticipated," the RBA said.
After the RBA board meeting on Tuesday, governor Glenn Stevens again complained about the persistently strong Australian currency, saying it was "uncomfortably high".
In its statement on Friday the RBA said the level of the Australian dollar is a "source of uncertainty" for the Australian economy.
The Australian dollar fell in the first half of 2013 but rose against a weak US dollar during the two-week government shutdown, caused by the Congress being unable to pass a budget.
"There is some chance that the exchange rate will remain around current levels over the forecast horizon," the RBA said on Friday.
JP Morgan economist Ben Jarman said the Reserve Bank is setting up a "game of chicken" between the cash rate and the Australian dollar.
He said the central bank is hoping that the exchange rate will fall significantly and help stimulate the Australian economy, which will save the RBA from more rate cuts.
"They will have to stare down the data and under-deliver on rates through another year of sub-trend growth and rising unemployment," he said.
"We are sceptical they can do this.
"So if currency markets call their bluff, and there is no material depreciation in the Australian dollar relatively soon, we expect the data to drag the Board back to the table for further easing in 2014."
Westpac chief economist Bill Evans said the RBA's statement leans towards further interest rate cuts.
"we did not expect such a growth downgrade," he said.
"In effect these forecasts indicate that the Bank has delayed its forecast return to above trend growth by a year."
While more and more economists are forecasting that the RBA won't cut the cash again this cycle, Westpac is predicting a quarter of a percentage point reduction in February and another in May.
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