The Reserve Bank has downgraded its growth forecasts for the Australian economy, but still predicts a bounce back over the next few years.

The RBA now sees growth in December 2017 of 2 to 3 per cent, a slight reduction from the 2.5 to 3.5 per cent in the previous forecast in May.

“The economy is expected to grow at an annual rate of around 3 per cent over the next couple of years which is a bit higher than estimates of potential growth,” the RBA said.

The central bank has forecast inflation returning to 2.5 to 3.5 per cent by June next year, citing business investment growth, a higher iron ore price and an unemployment rate of below 5.5 per cent as the motivation for its outlook.

“The outlook continues to be supported by accommodative monetary policy and an improvement in the global economy,” the statement said.

The Reserve Bank has left the cash rate on hold at the record low 1.5 per cent.

Its statement says a pickup in inflation will be boosted by a declining capacity in the labour market, which will lead to a gradual increase in wages growth.

It also believes the Fair Work Commission’s decision to increase minimum and award wages could “add a little” to wages growth in the September quarter.

“Inflationary pressures would instead emerge more quickly if workers seek to catch up after a long period of low wage growth,” the RBA said.

But the RBA is still concerned about the Australian dollar, which has been at levels not seen since 2014.

“Further exchange rate appreciation would tend to generate a slower pickup in economic activity and inflation than currently forecast,” it said.

The RBA also warned that continued slow wage growth will weigh on a consumption driven recovery.

“Some households may feel constrained from spending more out of their current incomes because of high levels of household debt,” the RBA said.

“This effect would become more prominent if housing prices and other housing market conditions were to weaken significantly.”