Rates tipped for a pause

RATES are expected to remain on hold next week after new business investment figures showed the economy is slowing down.

INTEREST rates are expected to remain on hold next week after new business investment figures showed the Reserve Bank's increases have started to slow the economy.

Data yesterday showed total business spending on their operations in the first three months this year shrivelled under the weight of the global financial crisis and the 12-year-high official rates.

The unexpected drop raised the possibility Australia's economy could be headed for contraction in the first quarter, or a decline in gross domestic product from the heady, fourth-quarter level.

Australian Bureau of Statistics data showed new private capital expenditure fell by 2.5 per cent in the first quarter to $20.56 billion, when analysts had expected a solid rise of 3 per cent.

JPMorgan economist Helen Kevans said the soft business spending levels raised the possibility first-quarter gross domestic product could decline from the fourth-quarter level, which would be the Australian economy's first contraction since late 2000.

But she said the data also showed companies' future overall spending targets remained strong, with plans to lift spending by 24 per cent overall in the year starting this July.

CommSec chief equities economist Craig James said the mining sector was the only industry to post strong spending gains in the March quarter -- with spending up by 4 per cent -- while manufacturing sector spending eased by 0.6 per cent.

Spending in South Australia rose 13.9 per cent while spending in Queensland, WA and the ACT rose 3.1 per cent.

"Not even the US sub-prime (mortgages) crisis could dull miners' optimism,'' Mr James said.

"Not only did they spend more on new buildings and equipment, they lifted spending plans for the next year by almost 10 per cent.''

Outside the mining sector, businesses spent less on new buildings and equipment in the first quarter and trimmed spending plans for the coming year.

The RBA is widely expected to leave interest rates on hold at 7.25 per cent when it meets on Tuesday for its monthly board meeting.

But analysts say RBA rate rises remain a risk this year if domestic spending doesn't cool for long enough to ease pressure on inflation.