Rollercoaster rates mean economic trouble

AUSTRALIA has entered the economic danger zone and the RBA is under fire from experts as it struggles to avoid a crash landing.

Rollercoaster rates mean economic trouble

AUSTRALIA has entered the economic danger zone and the Reserve Bank is under fire from market experts as it struggles to avoid a crash landing.

The central bank is almost certain to slash interest rates in less than two weeks in a bid to rescue the national economy from a major slowdown.

But leading economists were scathing of the Reserve yesterday, saying it had ramped up rates too high and ordinary householders were paying the price.

"Rates went too far and the Reserve is now trying to reverse them," AMP Capital's chief economist Shane Oliver said. "They are now becoming more concerned that we might have a recession."

The dire prediction came as a report found new home building in Queensland would slump nearly 20 per cent in the last three months of this year.

Another survey found small business conditions had sunk to a 12-year low while Virgin Blue announced its yearly profit had more than halved.

But the worst news came from the Reserve Bank Board. Its minutes of the August 5 meeting contained the strongest warning yet about the need to cut rates. "Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase," the minutes said.

Economists seized on the statement saying it was certain rates would drop from their 12-year high on September 2, with more cuts this year.

"We think there could be three cuts in a row," Josh Williamson, of TD Securities, said.

Interest rates have jumped eight times in three years and are now 7.25 per cent. There will be enormous pressure on the major banks to pass on the cuts after warnings from the Reserve and Treasurer Wayne Swan.

The economy has now taken centre stage of federal politics but there was no sign yesterday of any agreement between the major parties.

Opposition Leader Brendan Nelson vowed yesterday to block more than $3 billion worth of Budget tax measures in the Senate, claiming the new taxes would push up inflation. Mr Swan called such a move irresponsible.

Mr Swan said the Coalition was being "dangerously irresponsible" and destroying the Budget surplus at a time of "international uncertainty".

The Reserve Bank Board minutes revealed deep concern about conditions overseas, with a warning that demand from China was slowing and fears about the US and Japanese economies.

But the Reserve Bank also acknowledged Australian households were doing it tough and had been hit hard with higher petrol bills and inflation cutting into spending.

It also revealed that falls in the sharemarket and house prices meant "household net worth had declined by almost 5 per cent over the first half of 2008".

Craig James of Commonwealth Securities said the central bank was clearly worried about international factors and a collapse in confidence. "In effect, Reserve Bank Board members believed that monetary policy had become so tight there was the risk of serious damage to the economy," Mr James said.

An interest rate cut of 0.25 per cent would reduce monthly repayments on a $300,000 home loan by about $50 a month.

Retail spending in Australia has dropped dramatically this year.