Sluggish growth fuels rate cut hopes

AUSTRALIA is set to experience the slowest economic growth in seven years which would make the case for a 50 basis point interest rate cut in September, a survey shows.

AUSTRALIA is set to experience the slowest economic growth in seven years which would make the case for a 50 basis point interest rate cut in September, a survey shows.

The Westpac-Melbourne Institute leading index, which predicts the likely pace of economic growth three to nine months into the future, showed an annualised growth pace of 2 per cent in June.

The reading was at the lowest point since July 2001.

The leading index has been below the long-term average of 3.9 per cent since February.

Westpac chief economist Bill Evans said global factors were largely responsible for the likely slowdown in economic growth.

"The slowdown in the growth rate of the index can be mainly attributed to the sharp fall in the share market; tighter liquidity as represented by money supply; weak dwelling approvals and softer data for US industrial production," he said.

Mr Evans said high borrowing costs would make a 50 basis point official interest rate cut in September more likely.

"With rates well into the contractionary zone and global liquidity conditions deteriorating there is a strong case for a larger first cut of 0.5 per cent," he said.

"That seems a more effective strategy than current market expectations of two consecutive 0.25 per cent moves."

The Reserve Bank left interest rates on hold at 7.25 per cent in August for the fifth month in a row.

The minutes of that August 5 board meeting, released yesterday, suggested the RBA expected economic growth to have slowed down in the June quarter, with low growth also possible in the September quarter.

The RBA last cut interest rates in December 2001.