Economy can only lean on rates for support

A leading business lobby group expects the central bank will need to cut interest rates twice more this year, disappointed the reductions during 2012 have had little impact on confidence.

But Australian Chamber of Commerce and Industry (ACCI) chief economist Greg Evans says there are some opportunities for federal government stimulus spending to work alongside monetary policy.

"Unfortunately the cupboard is pretty bare," Mr Evans told reporters in Canberra on Tuesday.

"The opportunities are more limited given the state of the budget."

The Reserve Bank of Australia (RBA) will hold its first board meeting of the year in two weeks, but at this stage financial markets see a rate cut more likely occurring at the March meeting.

Markets are betting on a 30 per cent chance of a cash rate cut in February from three per cent to a record-low cash rate of 2.75 per cent, but they see a 70 per cent chance of a move come March.

But such views could change after Wednesday's release of official inflation figures.

Economists' forecasts for the December-quarter consumer price index (CPI) centre on a modest 0.4 per cent rise after the surprise 1.4 per cent jump in the previous three months.

This would see the annual inflation rate at 2.4 per cent, comfortably within the RBA's two to three per cent target band.

More crucial to the interest rate outlook, underlying inflation is forecast to rise 0.7 per cent in the quarter for an annual rate also of 2.4 per cent.

A weaker underlying inflation outcome could trigger a February cash rate reduction.

The ACCI survey of investor confidence released on Tuesday found that while business conditions improved slightly in the December quarter, the outlook remained gloomy for future sales and profitability.

"This builds a strong case for the need for further interest rate cuts," Mr Evans said.

In the survey's components, business conditions rose to 49.2 points in trend terms in the December quarter from 48 points in the previous three months but remained below the key 50-point mark separating growth from contraction.

But the index for business conditions expected in the March quarter sat at 46.2 points.

Worryingly, the "climate for investment" index shrank to 34.1 points, its lowest level since the survey began in 1998.

"Intentions to invest, employ and borrow - these are at the lowest level in 15 years, which is clearly a concern," Mr Evans said.

He said the RBA had been looking for economic growth to more broad-based, beyond mining.

"That's not happening at the moment," he said.

The survey also showed for the 18th consecutive quarter, business taxes and government charges remained the biggest constraint to investment.

Mr Evans said while opportunities for the federal government to help stimulate the economy were restrained, ACCI supported a suite of measures for tax, regulation and labour market reform.

"It's not necessarily going to achieve short-term relief, but certainly it will provide a better atmosphere to improve confidence over the longer term," he said.

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