THE Reserve Bank considered the case for an "early reduction" in interest rates at its board meeting two weeks ago amid concern the economy may be heading for a "deeper and more persistent slowing".

Minutes of the meeting released yesterday reveal concern about financial conditions being "clearly quite tight" due to unofficial interest rate rises by the banks and the rising cost of international funding.

Given tumbling share prices, battered consumer sentiment and slower economic growth, these tighter conditions were "not warranted".

"Less restrictive conditions could soon be called for, otherwise the risk of a deeper and more persistent slowing in the economy would increase," the minutes state. "On these considerations, a case could be made for an early reduction in the cash rate."

But arguing against an immediate cut last month, board members expressed concern the economy was entering a long period of high inflation.

A breakout in wage demands, flowing from anticipated higher costs of living, remains the bank's greatest concern: "If that occurred, the cost of reducing inflation later would be greater."

But a Melbourne Institute survey of wages has found inflation is not yet feeding into higher wages.

The annual pace of wage growth slowed from 7.5 per cent to 4.9 per cent in the three months to August.

Pay growth of about 3 per cent is expected in the year ahead. Male workers are more optimistic than female workers, expecting increases of 3.7 per cent versus 2.4 per cent among women. The institute said this was consistent with full-time workers expecting higher wages than part-time workers, and two-thirds of females workers being part-time.

In its board minutes, the bank said indicators on wages had so far failed to register any appreciable pick up in wages.

This is despite household net worth having fallen 5 per cent in the first half of this year, due to falling equity prices and, in some cases, falling house prices.

The bank also noted consumption spending had "weakened considerably" this year.

However, liaison with retailers suggested a slight rebound last month, when budget tax cuts also began to hit pay packets.

Having left interest rates on hold at its last meeting, the bank is expected to cut interest rates at its next meeting on September 2, with another cut expected before Christmas.

A survey of small businesses by the Australian Chamber of Commerce and Industry found conditions were at their lowest level in more than a decade, with sales contracting for the first time in five years.