Predictions about an end to the Reserve Bank's easing cycle in the past two months have been reversed in recent weeks, as continued soft economic data point to an increased chance the central bank could lower rates for the first time this year.
The case for an interest rate cut next Tuesday was boosted by continued weakness in private sector credit growth, according to figures released by the Reserve Bank.
Financial markets are pricing in a 41 per cent chance of a rate cut, the highest expectations since the RBA's February decision to keep rates at 3 per cent. The markets were also pricing in at least 50 basis points of cuts by the end of the year.
Private sector credit edged higher by 0.2 per cent in March, continuing a similar rise the month before and bringing growth over the past year to 3.2 per cent. The soft growth represented a "prolonged state of weakness" since the financial crisis, Westpac senior economist Andrew Hanlan said.
Business credit remained flat after falling 0.2 per cent in February, and increased 2.6 per cent over the past year. Housing credit performed the strongest, rising 0.4 per cent last month.
The tepid growth reflected continued consumer and business caution about borrowing and spending, analysts said. At the same time, households and corporates maintained their preference for saving and stronger balance sheets.
"All components of credit are showing no sign of accelerating out of the range they have been in for the past six months or so," Citi economists Paul Brennan and Josh Williamson said. They expected a 25 basis points cut in May or June.
Meanwhile, the National Australia Bank's quarterly ASX300 business survey found conditions remained stable last month.
While the finance, business and property sector strengthened, retail and manufacturing weakened, the survey found.
A separate survey by credit data research group Veda released on Wednesday found that business credit demand slowed for the second consecutive quarter, the first time since 2010.
Rate cuts expectations were also strengthened by a lower-than-expected inflation rate in the first three months of the year and the highest unemployment rate since 2009 in March.