WRAPUP 1-Australia inflation turnaround sanctions rate cuts

* TD-MI inflation gauge falls by record in Nov

* Manufacturing activity slumps to new lows

* RBA seen cutting rates by at least 75 basis points

By Wayne Cole

SYDNEY, Dec 1 (Reuters) - Australian inflation is slowing much faster than earlier thought while manufacturing activity hit record lows in November, strengthening the case for a steep cut in interest rates this week.

The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Tuesday and is considered almost certain to cut its 5.25 percent cash rate by at least 75 basis points. The central bank has already cut borrowing costs by 2 percentage points since September in an increasingly urgent effort to stave off recession.

Data out on Monday highlighted the urgency. A private gauge of inflation fell in November by its biggest ever margin while a manufacturing survey showed the biggest contraction in 16 years.

"We suspect a move of 100 basis points is more likely now," said Michael Workman, a senior economist at Commonwealth Bank. "With inflation slowing more quickly than expected, there's really no harm in being aggressive to support growth."

Nor will the RBA be alone. The European Central Bank, Bank of England and Reserve Bank of New Zealand are all expected to cut rates this week in a global campaign to revive growth.

Australia's Labor government is also playing its part. Over the weekend, it announced extra spending on hospitals and schools worth A$15 billion ($9.8 billion) over five years. That comes on top of a A$10.4 billion stimulus package due to fatten wallets this month.

The economy needs all the stimulus it can get. Figures on gross domestic product due on Wednesday are expected to show growth of just 0.2 percent in the third quarter, with some risk of an outright contraction.

Indeed, data on business inventories on Monday suggested they made no contribution to growth last quarter when analysts had generally looked for them to add 0.2 percentage points.

Business sales were also soft in the quarter and while gross operating profits rose a healthy 5.2 percent, much of that was from the mining sector and is unlikely to be repeated as commodity prices fell steeply in recent months.

"Sales were pretty weak in the quarter and inventories provided no upside for GDP," said Brian Redican, a senior economist at Macquarie.

INFLATION RETREAT

The sharp slowdown in domestic demand has cooled inflation more quickly than many had expected.

A gauge of inflation from TD Securities and the Melbourne Institute fell 0.6 percent in November after a 0.2 percent dip in October. The fall was biggest since the survey began in 2002 and owed much to a 19 percent drop in petrol prices.

Annual inflation slowed to 3.0 percent, from 3.9 percent in October, and a peak of 4.8 percent as recently as June.

"There has been a quite staggering turnaround in price pressures," said TD senior economist Joshua Williamson. "It fundamentally changes the economic and policy outlook."

Indeed, such was the reversal in prices that the official measure of consumer inflation could fall both this quarter and next, said the Melbourne Institute.

Such an outcome could drag the annual pace of inflation below the central bank's 2-3 percent target band, which would be a major surprise for policy makers.

Williams argued that the speed of the turnaround argued for another cut of 100 basis points on Tuesday and further drastic easing to 2.5 percent next year, which would be by far the lowest since the central bank adopted an official cash target in the early 1990s.

"The inflation problem has been turned on its head," he added, noting that the move from high inflation to low inflation, or even deflation, was a global phenomenon.

Other figures published on Monday all added to the case for lower borrowing costs.

The Australian Industry Group and PriceWaterhouseCoopers Performance of Manufacturing Index (PMI) based on a survey of 500 firms sank a seasonally adjusted 7.7 points in November to 32.7.

That was the lowest reading since the survey began in 1992 and far below the 50 mark separating growth from contraction.

The survey's index of new orders, a leading indicator of demand, fell a steep 14.4 points in November to a lowly 24.5.

"Of particular concern is the alarming fall in new orders," said Ai Group's chief executive Heather Ridout. "This does not augur well and suggests a poor end to 2008 and an equally weak start to the new year." (Reporting by Wayne Cole; Editing by Tomasz Janowski)