* Q1 business investment -4.4 pct q/q vs forecast -2.4 pct
* Spending plans for 2015/16 very weak at A$104 bln
* Firms seen wanting unrealistic returns from investment projects
By Wayne Cole
SYDNEY, May 28 (Reuters) - Australian businesses investment suffered the largest fall in over six years last quarter while spending plans for the year ahead came in far below expectations, a deeply disappointing report that sent the local dollar reeling.
The news will be a bitter pill for the Reserve Bank of Australia (RBA) which only just cut interest rates to a record low of 2 percent in the hope of reviving business spending.
Thursday's data from the Australian Bureau of Statistics reported investment fell 4.4 percent to A$35.9 billion ($29.4 billion) in the first quarter. That compared to forecasts of a 2.4 percent drop and was the biggest decline since late 2009.
Crucially, spending plans for 2015/16 were on the weak side of expectations at A$104 billion, with sectors outside of mining showing little inclination to spend more.
"There's still not a lot of evidence that non-mining investment is filling in the gap left by the collapse in mining," said Shane Oliver, chief economist at AMP Capital Investors.
"It tells us there's still a risk that the Reserve Bank may have to cut interest rates again."
Investors reacted by knocking the local dollar down more than half a U.S. cent to $0.7694, while government bond futures rallied sharply on speculation the RBA might not be done easing policy.
The central bank holds its June meeting next week and is considered almost certain to hold rates steady this time as it gauges the impact of its May move.
Financial markets imply around a 60 percent probability of another cut by Christmas <0#YIB:> with much depending on how investment fares from here.
After a decade of madcap expansion, mining is in full retreat as projects reach completion and lower prices for many commodities force companies to cut costs.
Policymakers have been hoping other sectors would step up to fill the void, only to be repeatedly disappointed.
In a recent speech, RBA Deputy Governor Philip Lowe floated one idea for why investment has been so insensitive to policy easing, a phenomenon seen across many developed nations.
He suggested firms had not adapted to the new normal of low global returns and now had unrealistic hurdles for their investment projects.
He cited a survey of finance officers by Deloitte which found that over 80 percent required an investment to earn a return of 10 percent or more to even be considered for approval. Half of those wanted a return of at least 13 percent.
That was a very high bar given yields on Australia's 10-year sovereign debt were less than 3 percent.
"One issue that this raises is what is the appropriate hurdle rate of return in a world of persistently low interest rates?" wondered Lowe. "It may well turn out that the average answer is - or should be - lower than it used to be." (Reporting by Wayne Cole; Editing by Eric Meijer)