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REFILE-Australia's c.bank has limited options as economy sinks into steep slump

(Corrects story link in paragraph four)

SYDNEY, Sept 1 (Reuters) - Odds are narrowing for further policy easing by Australia’s central bank, which on Tuesday hinted at additional policy measures to support an economy reeling from its worst contraction in almost a century.

While the bar for fresh action remains high, a resurgent Australian dollar and a coronavirus-driven shutdown in the second-most populous state of Victoria could tip the scales for the Reserve Bank of Australia (RBA), economists say.

On Tuesday, the RBA signalled as much after it left the cash rate at 0.25%, saying it “continues to consider how further monetary measures could support the recovery”.

The dovish signal comes ahead of data due on Wednesday which would confirm Australia’s A$2 trillion ($1.5 trillion) virus-ravaged economy is in its first recession in three decades and the worst since the Great Depression.

One option is for the RBA to chop the cash rate further to 0.1%. Interest rate futures are already implying a 15-basis-point cut as soon as next month.

The RBA has repeatedly said that negative rates were “extraordinarily unlikely” so a deeper cut is not anticipated, though some economists say it cannot be completely discounted.

Another option is boosting its purchase of government bonds as part of “unlimited” quantitative easing launched in March.

“Ultimately, we think the RBA will ease further sometime in the next six months,” AMP chief economist Shane Oliver said.

“A rate cut to 0.1% is possible but may not have a big impact which leaves more bond buying across a broader range of maturities as the main tools for any further easing.”

Economists are also of the view that the RBA should shift more explicitly to inflation average targeting following similar action by the U.S. Federal Reserve last week, a move that would ensure interest rates remain low for longer.

This would mean tweaking its forward guidance to commit to not increasing the cash rate until full employment is reached, and ensuring inflation is sustainably within the 2-3% target band, as opposed to when ‘progress is being made towards full employment’ and when it’s ‘confident inflation will be sustainably’ in the band.

Additional monetary stimulus would also help tame the local dollar which has surged 34% since hitting an 18-year low of $0.5510 in March.

“Matching the Fed on inflation average targeting, more dovish forward guidance and...more aggressive bond buying could all help keep a lid on the A$,” AMP’s Oliver said. ($1 = 1.3512 Australian dollars) (Reporting by Swati Pandey; Editing by Shri Navaratnam)

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