Goldman Sachs has tweaked its interest rate outlook for 2013 to include an additional cut, and has also lowered its Australian growth forecast.

In a significant adjustment to its 2013 forecasts, Goldman Sachs has added a third interest rate cut to its expectations and has brought forward the timing of the easing cycle.

The broker has lowered its end of 2013 interest rate forecast by 25 basis points, which will take the official cash rate from 3 per cent currently to 2.25 per cent. It now expects a 25 basis point cut in February, May and August as the RBA tries to reignite below-trend growth in the non-mining economy.

"There are five main reasons behind this decision: softer data into year end, an important RBA speech set the framework for low interest rates for a long time, a rising Australian dollar is offsetting the impact of declines in lending rates, fiscal contraction looks set to remain regardless of whether the government abandons the aim to return to budget surplus in 2012-13, and an appreciable lift in productivity has provided scope to ease interest rates further in the nearer term,” Goldman Sachs noted.

Aside from the economy operating at below trend over the last few years, the broker believes potential growth has been impacted by a combination of weakening productivity and labour force growth. Looking forward, Goldman thinks there is enough reason to believe that population and participation dynamics will act as an increasing headwind to potential growth.

Having said that, it does note that a cyclical pick-up in productivity is likely to provide a material offset, particularly "late in the period as the ‘pay-back’ period from mining capital investment from 2009 to 2013 underpins a significant increase in export volumes”.

This has seen the broker revise downwards its real economic growth forecasts for the coming year to 2.75 to 3 per cent, from 3 to 3.25 per cent.

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