Financial markets are factoring in a 50 basis point cut in interest rates next week after economic data released today showed signs of underlying weakness in the economy.
Economists expect the Reserve Bank of Australia (RBA) to slash official interest rates in October, as the weakest building approvals data in seven years and soft retail sales figures provided further evidence that the economy is slowing.
Historic plunges on the share market today, following US President George Bush's failure to get Congressional approval for a Wall Street rescue package, are also helping to underpin the case for a domestic rate cut.
But even if the RBA does lower official interest rates there is no guarantee banks will pass on the cuts to home owners. Federal Treasurer Wayne Swan warned today that the global financial crisis would keep the borrowing costs high for banks, making them more reluctant to cut home loan rates.
Australian Bureau of Statistics data out today showed a 0.6 per cent seasonally adjusted jump in retail sales during August, but this included a 3.4 per cent dive in department store trade.
In the same period, building approvals figures slumped by 3.7 per cent slump to 12,095 projects - the lowest tally since mid-2001.
While the retail sales number for August was triple market forecasts for a 0.2 per cent rise, economists said the figure would have been much weaker if food retailers had not enjoyed a 2.2 per cent jump in sales.
ANZ senior economist Katie Dean said retail trade for August would have recorded a 0.5 per cent slump if food was excluded from the data.
"Clearly the headline number was better than expected, but when you have a look into the detail of this data it is not as good as what the headline suggests,'' she said from Melbourne today.
"If we exclude food, then retail sales actually fell by 0.5 per cent, which is a very poor result.
"Retailing remained relatively subdued in the middle of this year.''
Senior markets economist with nabCapital, Spiros Papadopoulos, said the overall bounce in August retail sales had more to do with a rebound from a weak June quarter and the Rudd government's tax cuts.
ICAP senior economist Adam Carr said the weakest building approvals in seven years added to the case for a bigger than usual rate cut in October.
"Building approvals are down to their lowest level since 2001 and not too far off recessionary levels,'' he said.
"Today's data adds to the case for a 50 basis point rate cut by the RBA at its next meeting.''
The slump in building approvals was led by a 7.8 per cent decline in the private "other'' dwellings category, which includes apartments, and a 0.8 per cent fall in private housing.
In the year to August, building approvals fell 8.6 per cent, which was the biggest annual decline since May 2006.
Since the recent peak in November, Australian building approvals have weakened by 17 per cent.
St George Bank acting chief economist Besa Deda said tight financial conditions, share market losses and low housing affordability were spurring a downturn in the Australian housing market.
Financial markets are expecting the RBA to cut interest rates by 50 basis points when the central bank board meets on October 7, which would take the cash rate to 6.50 per cent.
"The main focus of that discussion (amongst the board member) will clearly be the events in the United States and also financial markets and commodity markets over the last couple of weeks,'' she said.
Official interest rates have not been cut by half a percentage point since April 2001, in the aftermath of the dot com crash.
The US House of Representatives last night voted against US President George Bush's Troubled Asset Relief Program plan to buy rotten mortgage debt, which has sent share markets into a tumble.
