Confidence index slumps to lowest point

SYDNEY - Australian business confidence slipped last month to the lowest level in more than a year, adding to signs that higher interest rates are eroding domestic demand and driving the local dollar down by the most in almost two weeks.

The confidence index halved from June to 2 points, according to a National Australia Bank survey of more than 400 companies between July 26-30 and released in Sydney yesterday.

Business sentiment has waned for the fifth straight month, particularly among companies that are not tied to the mining boom, underscoring the two-speed nature of the nation's economy in which retail sales, dwelling construction and lending have weakened.

Central bank governor Glenn Stevens kept the benchmark rate unchanged last week for a third month on the weakest inflation in three years, after boosting borrowing costs six times between October and May.

"The prospects for domestic demand in the second half of 2010 have weakened significantly," said Alan Oster, chief economist at National Australia in Melbourne.

Slower economic growth "will need to be watched and in this environment inflation in the September quarter is unlikely to provide a November trigger" for an interest rate increase, he said.

Oster also said the central bank was unlikely to consider tightening monetary policy before February.

Further evidence of weaker domestic demand may hamper Prime Minister Julia Gillard's push to win Australia's August 21 federal election.

To spur the economy during last year's global recession, the government spent more than A$42 billion ($38 billion) distributing cash to households and expanding schools, hospitals and roads.

Most of that stimulus ended last year.

- BLOOMBERG