The Reserve Bank could slash its interest rate to just 1.5 per cent within a year amid weak consumer confidence and rising unemployment.

That’s the view of analysts from Credit Suisse who argue the RBA’s current cycle of rate cuts isn’t over, despite concern about rising house prices.

“We believe that the RBA is not done with its easing cycle. We think that the bank needs to cut rates below two per cent,” analysts Damien Boey and Hasan Tevfik said in a research note.

Mr Boey and Mr Tevfik argue the RBA’s cash rate could be cut from its current level of 2.5 per cent to as low as 1.5 per cent over the next year.

Consumer confidence has slumped to below average levels and the unemployment rate has reached 6.2 per cent and could rise further as Australia’s economy struggles to adjust to the end of the mining investment boom.

Meanwhile, inflation remains subdued at just over two per cent, which gives the RBA room to cut if necessary.

The Credit Suisse report also argued that, despite the RBA’s concerns about the booming property market, rising house prices could have the effect of keeping interest rates lower because higher mortgages means higher repayments for homeowners.

“As principal payments have risen, the ability of households to tolerate higher interest payments has fallen, putting pressure on the RBA to keep interest rates lower for longer,” the report said.

Meanwhile, a report from credit rating agency Moody’s suggests house prices across the country would become overvalued were the cash rate to rise to four per cent.

It said house prices were generally fairly valued at current interest rates, but the situation would be substantially different if rates were higher.

With a cash rate of four per cent, the Moody’s report said, house prices in Victoria would be overvalued by more than 24 per cent, while NSW house prices would be overvalued by around 13 per cent.

House prices in the Northern Territory would be overvalued by about 14 per cent, while Tasmania and the ACT prices would be overvalued by just under 13 per cent.

Queensland prices would be overvalued by about 5.6 per cent, compared to 9.5 per cent for South Australia and 2.9 per cent for Western Australia.


By Evan Schwarten