The Reserve Bank has signalled that an interest rate cut is on the way, possibly as soon as next month, as economic conditions deteriorate domestically and globally.
The Reserve Bank's intentions were made clear as a small business survey from the Australian Chamber of Commerce and Industry showed business conditions at the lowest level since the survey began in 1996, with the Housing Industry Association forecasting a further significant decline in building activity in 2008-09.
Minutes of the Reserve Bank Board meeting on August 5, released yesterday, state that, while interest rate settings were appropriate ''for the time being'', the deteriorating economic conditions meant the ''scope to move towards a less restrictive setting of monetary policy was judged to be increasing''. The Reserve board noted international economic conditions were generally seen as weak and, while the Australian economy was benefiting from high commodity prices, domestic growth was likely to be weaker.
''The national accounts for the June quarter, to be published in September, were likely to show that growth of GDP had been low, and the staff forecasts suggested that a weak outcome in the September quarter was also possible,'' the minutes state.
Board members noted consumption spending had weakened considerably in 2008, household net worth had declined by almost 5 per cent in the first half of 2008, building approvals had declined and there were signs of rising unemployment.
''Given that there had been a significant change in borrowing behaviour, confidence was weaker, asset prices had declined and slower overall growth was in prospect, tighter financial conditions were not warranted,'' the minutes said.
The board noted ''a lengthy period of inflation above the target was occurring, with the attendant risk that this would begin to affect wage setting''. While there was no evidence of this occurring, the minutes say, an outbreak of wages inflation would incur greater costs which would then factor into interest rate considerations.
The Australian Chamber of Commerce and Industry survey released yesterday showed the small business conditions index fell to 43.4, the lowest level since the survey began in December 1996 and more than 10 points below its five-year average of 54.8.
ACCI industry policy and economics director Greg Evans said, ''The RBA at its September meeting should really take account of the impact of the slowing domestic demand and the particularly severe impact it has had on small business.
''We believe that now a rate cut is required in September and further rate cuts are required before the end of the year.''
The pessimistic sentiment from ACCI coincided with figures released yesterday by the Housing Industry Association that indicate housing starts falling to about 145,000 this financial year, a decline of 6 per cent.
HIA policy chief executive Chris Lamont said, ''Sharply higher borrowing rates and building material prices, together with hefty statutory costs to building, have generated a sharp decline in leading housing indicators over the last six to nine months.
''Interest rate reductions will, in time, boost confidence and then construction activity, but that's a 2009-10 story. We expect the recovery to be modest over 2009-10 2010-11 given the lack of skilled labour in the industry and the long road ahead in lifting housing affordability to reasonable levels.''
Recent economic data, combined with Reserve Bank statements, have seen financial markets move to factor in a September rate cut as a certainty with further cuts likely over the next year. DeutscheBank chief economist Tony Meer said yesterday, ''All the indicators are for a 25-basis-point cut in September, with the possibility of 50.''
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