The fall in inflation recorded in the December quarter 2008 confirms the urgent need for the Reserve Bank of Australia (RBA) to continue cutting interest rates. December 2008 saw the largest quarterly fall in the cost of living in more than a decade and inflation is now receding.

With inflation trending back into the RBA’s target band, and growth falling away, there is simply no argument for maintaining high interest rates, according to the Australian National Retailers Association (ANRA) the RBA should make a further one per cent cut in the cash rate next week.

Cutting interest rates alone won’t spark a revival of business and consumer confidence but lower interest rates will boost disposable incomes and give Australians at least the capacity to spend.

ANRA’s ongoing surveys of consumer expectations show that consumers are in a cautious mood. Its latest survey on spending intentions has found that Australians on average expect to spend 20 per cent less on discretionary items (e.g. clothing, white goods and recreational goods) over the next six months, compared to the first six months of 2008.

ANRA surveyed 1000 Australians aged 18 and over, asking respondents how much they planned to spend on discretionary items in the first six months of 2009, compared to the same time last year.

“Generation X and Y are less likely to switch off their spending,” said ANRA CEO Margy Osmond.

“Young people aged 18 to 34 say they’ll cut back by 15 per cent compared to the average 21 per cent.”

The slump in super and share portfolios are being reflected in the survey results. The empty nesters (Australians aged between 55 and 64) with the shrinking nest eggs are planning to cut their spending by 35 per cent.

“South Australia is an interesting case because the retail sector there has held up fairly well, but judging by this survey, shopping will cool quickly with South Australians predicting they’ll cut their spending by 31 per cent in the next six months. Adelaide is particularly gloomy with spending forecast to drop 41 per cent,” said Osmond.

The boom is clearly over in Western Australia, as far as this survey is concerned with a 27 per cent reduction in spending forecast for the first half of 2009, compared to 2008. Also, NSW, which has been in a retail recession for six months, is not any closer to a recovery with shoppers in that state trending with the average.

“The only people to go against the national trend are women in the fashion capital – Melbourne – they only plan to cut their spending by nine per cent.

“Melbourne’s women cannot escape the lure of new shoes, bags and clothes, especially compared to the ladies in Sydney who say they’ll cut their spending by 18 per cent,” said Osmond.