The Reserve Bank will cut interest rates by at least 75basis points today, and some economists are predicting it may slash a full percentage point.
Economic data out yesterday increased the chances of a bigger-than-expected rate cut for the third month in a row.
The Australian Corporate Health Index showed three-quarters of Australian companies were in declining health and one in five were at risk of going bankrupt.
The stockmarket fell again and new figures showed yet another record low in manufacturing activity, which dropped for the sixth consecutive month.
New Australian Bureau of Statistics figures showed company profits in the September quarter were stronger than expected. But the 5.2per cent rise in gross operating profit was on the back of continuing strong growth in the mining sector. The other sectors combined to record an overall 1.5per cent drop for the quarter and the figures take in only the beginning of the accelerated world slowdown that came after the collapse of US investment bank Lehman Brothers.
Rapidly dropping petrol prices helped the TD Securities-Melbourne Institute inflation gauge fall by the biggest margin in its six-year history, going from 3.9per cent in October to 3per cent for the year to last month.
TD Securities senior strategist Joshua Williamson predicted interest rates would reach record lows of 2.5per cent by the middle of next year.
He is tipping a cut of one percentage point today, although most economists, including JP Morgan's Helen Kevans, are forecasting a 75-basis-point reduction.
''Previously, we had expected only a 50-basis-point move but we think the RBA will move more aggressively, with the near-term imperative to ensure the policy stance is appropriate to deal with the increased risk of global deflation, renewed instability in the banking system and plunging confidence,'' she said.
A 0.75-point cut would take official rates to 4.5per cent and give home owners a $140-a-month reduction on repayments on an average $300,000 mortgage if the banks pass it on in full.
But National Australia Bank chairman Michael Chaney would not guarantee his bank was going to do so, saying only it would ''endeavour to''.
''Funding costs have risen around the world and we're subject to these increased funding costs, but we'll certainly pass on as much of that as we can because we recognise the need to enhance demand in the community,'' he said.
Treasurer Wayne Swan said he expected the banks to play their role in strengthening the Australian economy and ''should there be a cut in official interest rates, to pass it on as responsibly and fully as possible''.
Despite continued Opposition attacks yesterday, Mr Swan again said he would take the budget into deficit next year if the global financial crisis got worse.
''We have said that a deficit is not necessary now but that it is irresponsible to rule it out. ... if there was a temporary deficit then it should be for the shortest time possible consistent with strengthening growth and jobs,'' he said.
Shadow treasurer Julie Bishop said the Government's repeated talk of deficits sent a very bad sign to the Australian public.
''We need confidence in our economy at this time. If confidence is shattered, the banks don't lend and people don't spend.''
Economists have urged the Government to consider a temporary deficit in a bid to reduce the chances of Australia going into recession, which would happen if there were two successive quarters of negative growth.
Today's Reserve Bank board meeting the last scheduled until February comes a day before the ABS issues its latest national accounts figures, which economists recently predicted would include a 0.2per cent increase for the September quarter.
This would give an annual gross domestic product growth rate of 1.9per cent.
with AAP