Rate relief is on the cards for borrowers after the central bank indicated it expects slowing growth in the economy will allow it to cut interest rates without risking a long-term inflation break-out.
"The evidence to date is that a significant moderation in demand is now occurring, and it is looking more likely that demand will remain subdued, and economic growth will be fairly slow, in the period ahead," the Reserve Bank of Australia said in its quarterly Statement of Monetary Policy today.
The bank's statement echoed comments it made last week when it left official rates unchanged at 7.25pc but made clear that signs of a weakening economy, including falling retail sales and fewer new home loans, showed its series of rate rises were working to cool excessive demand.
"On the assumption that the subdued demand conditions are likely to continue, scope to move to a less restrictive monetary policy stance in the period ahead is increasing," the RBA statement said, reiterating last Tuesday's wording that investors interpreted as the bank's U-turn on rates.
"Today's statement signalled clearly that RBA officials are close to cutting the cash rate," said JP Morgan economist Stephen Walters in a note to clients.
"In particular, officials now place significantly more emphasis on the downside risks to growth in the economy - which were prominent in today's commentary - than the upside risks to inflation."
Mr Walters expects the RBA to cut its key cash rate to 7pc next month, followed by another 25 basis-point cut before the end of 2008.
While the prospects of lower rates will cheer mortgage-holders, doubts remain whether commercial banks will pass any cuts on to their customers soon.
ANZ Bank last week indicated that the global credit crunch had raised its costs of funds so that it may leave rates unchanged even if official rates fall.
The Reserve Bank has made no secret that its policy of raising rates to a 12-year high was intended to slow the economy down enough to bring inflation back to its target range of 2-3pc.
That inflation goal won't be reached until the June quarter of 2010 but not before the RBA expects inflation to peak at 5pc in the December 2008 quarter, up from about 4.5pc in the June quarter.
Indeed, inflation "remains a significant concern", not just in Australia but globally, as higher commodity prices flow through the economies, the bank said.
The RBA raised its prediction of where consumer price inflation will come in at for the June quarter just finished to 4.5pc, from an earlier forecast of 4.25pc.
"The forecasts for inflation have been revised upwards in the near term, but are broadly unchanged towards the end of the forecast period," the RBA said in the August quarterly statement.
"In addition, petrol prices have been higher than expected at the time of the May statement and inflation expectations appear to have risen somewhat."
While the economy remains near full-employment levels, though, the bank has signalled it's seeing enough evidence of an economic slowdown to take its foot off the monetary brake.
One reason for that confidence is that commercial banks have inflicted more pain than the central bank.
The Reserve Bank noted that mortgage rates are now about 1.5 percentage points higher than a year ago, while official rates have only risen 1 percentage point during that time.
The average standard variable interest rate is about 9.6pc.
Add in tumbling share prices to the mix of surging fuel and mortgage costs, and many households are feeling the pinch.
"Overall household consumption is expected to grow only modestly over the second half of 2008 in response to the tightening of financial conditions, the high level of petrol prices and falling household wealth," the RBA predicted.
Retail sales showed a contraction of 1pc in June, from a revised 0.9pc gain in May.
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