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Big rate drop tipped

PREDICTIONS of the Reserve Bank's next move on interest rates has shifted over the past month from a question of when to a question of by how much.

When the RBA board next meets on Tuesday, expectations are that the Bank will drop interest rates either 25 or 50 basis points.

Weighing in on the RBA's decision is the pressure to remove the differential between the Australian rates and that of the US.

On the domestic front, many of the economic indicators have been heading downward over the past six months.

Building activity has fallen by more than 25 per cent since June, while engineering construction fell 31 per cent during the September quarter to its lowest level since 1995.

Retail sales fell in November and job vacancies fell in December.

The inflation rate came in lower than expected giving further credence to a drop in rates.

And pessimism within the business community remains high with talk of a recession putting a damper on profit expectations - despite a 7.8 per cent drop in bankruptcies in 2000.

The latest Dun & Bradstreet National Business Expectations Survey revealed that expectations for profits and employment slumped further in December to be at the lowest level in a decade.

BankWest economist Alan Langford said the fundamentals of the Australian economy remained quite strong provided the Asian and the US economy held up over the next year.

The banks have already moved to reduce their interest rates which led to the Australian Finance Group issuing a warning to consumers to err on the side of caution before leaping into new mortgages offered by lenders.

AFG chief executive Steve Holloway said that while the new rates may look attractive, consumers should not lock into a rate at the beginning of a weakening interest rate trend.

"Don't fix now as you're clearly going to get a better deal further along this interest rate cycle, so adopt a wait-and-see approach," Mr Holloway said.

"Consumers may want to consider a longer-term view of a variable rate and utilise effective strategies to reduce principal and interest. This too may provide increased savings."

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