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Australia's central bank said it may soon cut interest rates for the first time in seven years to avoid a “deeper and more persistent'' economic slowdown.

“A case could be made for an early reduction in the cash rate,'' members of the Reserve Bank's board said in minutes of their Aug. 5 meeting, released in Sydney today.

The bank's statement acknowledged the highest borrowing costs in 12 years risks worsening a slowdown that saw the $1 trillion economy expand at its weakest pace in almost two years in the first quarter. Companies including Qantas Airways Ltd., Starbucks Corp. and General Motors Corp. are firing Australian workers as consumers cut spending to meet rising mortgage payments.

“The central bank has clearly gone too far'' in raising interest rates twice this year, said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “The positive aspect is that they're prepared to unwind that'' and will cut the rate by a quarter point on Sept. 2, he added.

The Australian dollar traded at 86.74 U.S. cents at 1:28 p.m. in Sydney from 86.55 cents before the minutes were released. The two-year government bond yield rose 2 basis points, or 0.02 percentage point, to 5.77 percent.

The currency has tumbled almost 12 percent against the U.S. dollar since reaching a 25-year high of 98.49 cents on July 16 as Reserve Bank Governor Glenn Stevens signaled he will cut the benchmark lending rate from 7.25 percent.

Economic Risk

The central bank's minutes said “less restrictive monetary conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase.''

The bank expects “low'' economic growth in the second and third quarters. Second-quarter gross domestic product figures will be released on Sept. 2.

“Given the slower trend in demand, scope to move towards a less restrictive setting of monetary policy was judged to be increasing,'' today's minutes said, reiterating what Stevens said on Aug. 5 when he left rates unchanged for a fifth month.

Stevens raised the benchmark in March, adding to increases in February, November and last August that boosted the overnight cash rate target by a total of 1 percentage point. The nation's five largest banks have increased home-loan rates by an average of 1.55 percentage points in that period as the global credit squeeze increased the cost of funding.

Credit `Tight'

“Financial conditions were clearly quite tight, and effectively getting tighter as a result of ongoing pressure on lenders' cost of funds in the market,'' today's minutes said 500 fast cash.

Reports since the central bank's August meeting have shown business confidence held in July at the lowest level since the 2001 terrorist attacks in the U.S., home-loan approvals fell in June to a four-year low and employers hired fewer workers.

Harvey Norman Holdings Ltd., Australia's biggest furniture and electronics retailer, said last month that sales growth slowed in the 12 months through June 30 as consumers spent less on sofas and household appliances.

Qantas Airways said on July 18 will cut 1,500 jobs, or about 4 percent of its workforce.

Starbucks, the world's largest chain of coffee shops, said on July 29 it will close three-quarters of its 84 Australian stores. General Motors' local Holden division has cut 600 jobs at its Adelaide factory and plans to close another plant with the potential loss of 500 workers.

Inflation Risk

The bank's minutes said there are “early signs'' the labor market is easing. Australia's unemployment rate rose to 4.3 percent in July from 3.9 percent in February, the lowest since 1974.

Policy makers decided on Aug. 5 that “tighter financial conditions were not warranted,'' given a slowdown in borrowing, falling consumer confidence, declining asset prices and the prospect of slower economic growth.

Still, they decided to keep rates unchanged because of the risk “a lengthy period of inflation'' above the bank's target range could begin to flow through to wages. “If that occurred, the cost of reducing inflation later would be greater,'' the minutes said. “Policy had to take account of this risk.''

Consumer prices will rise 5 percent in the fourth quarter after climbing 4.5 percent in the second quarter, the central bank forecast last week. It expects the inflation rate will fall below 3 percent during 2010.

The bank aims to keep inflation between 2 percent and 3 percent on average.

“The message is we shouldn't get too far ahead of ourselves,'' said Stephen Walters, chief economist at JPMorgan Chase & Co. in Sydney. “We are on track for a rate cut in September,'' though a 50-basis point reduction is “very unlikely,'' he said.

Investors expect the central bank will cut more than 1 percentage point from its benchmark rate in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps.

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