The Reserve Bank of Australia has hinted it will cut interest rates next month for the first time in seven years but concerns about near-term inflationary pressures are likely to limit the size of the easing, economists say.
The RBA board left official interest rates on hold at a 12-year high 7.25 per cent, on August 5, for the fifth month in a row.
The minutes of that RBA board meeting, indicate the central bank saw the case for a near-term rate cut to ward off a deeper economic slowdown.
The RBA predicted economic growth was likely to slow in the June and September quarters, and was conscious of tighter financial conditions that had pushed up lending rates.
"On these considerations, a case could be made for an early reduction in the cash rate."
AMP Capital Investors chief economist Shane Oliver said the RBA board minutes confirmed market expectations of a September rate cut but suggested a 25 basis point easing rather than a 50 basis point cut.
"If they don't move towards less restrictive conditions, the risk of a deeper or more persistent slowing of the economy would increase," said Dr Oliver.
"The language is not strong enough to suggest they are heading towards a 50 basis point cut next month."
CommSec chief economist Craig James said the RBA believed that tight monetary policy posed the risk of inflicting serious damage to the economy.
"While board members didn't consider a rate cut at the August meeting, it's clear that they wanted it on the agenda at the next meeting," he said.
The RBA said also that the outlook for demand was uncertain, with a rise in the terms of trade having the potential to add to national income and spending power.
The consumer price index surged by 4.5 per cent in the year to June 30, and the RBA said in the August board minutes that headline inflation was likely to rise in the near term.
"It was likely that the headline rate of inflation would rise further in the immediate future, but the softer demand outlook meant that inflation was still forecast to decline during 2009 and to be consistent with the target during 2010," the minutes said.
"The RBA board was clearly caught between the opposing policy needs of fighting high inflation and dealing with a growth slowdown with the potential to go too far," said Mr Roberts.
Mr Roberts said the RBA was more likely to cut interest rates in November after the October 22 release of CPI data for the September quarter.
