Bank modelling has RBA cutting rates to 1pc

The Reserve Bank’s decision to reduce interest rates could be just the first of several rate cuts.

The central bank reduced the official cash rate from 2.5 per cent to 2.25 per cent on Tuesday – and further cuts may be coming, according to one analyst.

Credit Suisse Australian Investment Strategy said although the Reserve Bank gave no hints on Tuesday about further cuts, recent speeches suggested that it would not cut once if it did not see the need for multiple rate cuts.

“We remain of the view that more rate cuts are coming – it is just a question of how deep the easing cycle needs to be,” it said.

“Our model of the cash rate suggests that a rate closer to one per cent is currently appropriate because of subdued private sector confidence, rising unemployment, excessive household gearing and low inflation.

“But a cut in the cash rate to one per cent would surely indicate a hard landing, consistent with defensive positioning!”

Credit Suisse said there is limited evidence to date of credit market stresses emerging to contribute to a hard landing.

However, it said it was worried about the global trend towards deflation, which would strengthen the case for further reducing interest rates.

A Westpac forecast, released in December 2014, included not only a 0.25 per cent cut this week but another a 0.25 per cent cut next month.

“Our reasoning is that the bank would not have disturbed such a long period of interest rate stability for just one move,” Westpac chief economist Bill Evans said.

[Related: Rate cut will be ‘double-edged sword for industry]

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