SYDNEY - Australia sharply upgraded its growth and jobs forecasts on Monday after bouncing back from the downturn but warned it was still on course for a record budget deficit.

Treasurer Wayne Swan said the economy was set to grow 1.5 percent in the current financial year, up from a 0.5 percent contraction forecast in the May budget, while unemployment would peak at a lower-than-expected 6.75 percent.

The forecasts, unveiled in the government's mid-year budget update, come a day before Australia is expected to raise interest rates for the second time in as many months following its world-leading recovery.

"What Australia has achieved is something special. We have avoided the destruction of our capital and our skills base that is usually accompanied by a sharp recession," Swan told reporters.

"That's something that all Australians can be proud of because it's something that we have done together."

However, the record budget deficit outlined in May looked set to widen slightly from 57.6 to 57.7 billion dollars (52.0 billion US), or 4.7 percent of GDP, while the economy will operate below capacity "for some time", Swan said.

"Notwithstanding the improvement in the economic outlook, the economy is not yet growing at a rate sufficient to prevent further rises in unemployment, incomes remain under pressure, and a sustained recovery in the major advanced economies is not yet assured," he said.

Swan said Australia remained on course to balance the books by 2016, although net debt would hit a height of 10.0 percent of GDP in 2013-2014. Unemployment was earlier forecast to peak at 8.5 percent next year.

The central bank is widely tipped to raise rates again on Tuesday after lifting them off five-decade lows last month, making Australia the first major Western economy to withdraw monetary stimulus in the wake of the downturn.