Australia's interest rates tipped to hit 3.75pc

INTEREST rates are tipped to fall to 3.75 per cent rate by March so that the Government can steer the country away from recession.

Mortgage relief with rates to be halved

INTEREST rates could be soon be halved with analysts tipping a 3.75 per cent rate by March so the Government can steer the country away from recession.

If the RBA were to cut rates by another 1.5 percentage points to 3.75 per cent by March, households with an average-sized mortgage could see close to $300 sliced off their monthly repayments.

As one of Australia's big four banks yesterday predicted more drastic action from the Reserve Bank, the Prime Minister put Australia on a "war" footing on unemployment.

Kevin Rudd told Parliament his Government was prepared to spend the surplus to stimulate the economy.

"I regard war on unemployment as the Government's highest priority," Mr Rudd said.

"The Government remains determined to take whatever additional action is necessary for the future in order to support the economy, to support growth and support jobs."

Mr Rudd's rally cry came as NAB chief economist Alan Oster yesterday slashed the bank's interest rate forecast just a day after the Reserve Bank drastically lowered its growth projections.

Despite official interest rates dropping two percentage points in the past three months, NAB expects the Reserve Bank to lower rates by another 0.75 of a percentage point next month to 4.5 per cent.

"This will be followed by another cut of 50 basis points in February and a further 25 basis point reduction in March to take the cash rate to 3.75 per cent," Mr Oster said.

Such a steep cut in interest rates from their current level of 5.25 per cent will provide huge relief to households and knock another $287 off the monthly repayments on a standard variable mortgage of $300,000. It would lower repayments on a $350,000 25-year standard variable mortgage by $334 a month.

While the major banks have resisted passing on the full benefits of recent falls in official rates, a dramatic reduction in the Reserve Bank's official rate would see a substantial drop in variable rates.

The big four banks - Commonwealth Bank, ANZ, NAB and Westpac - currently charge about 7.73 per cent but the forecast hefty falls could bring the standard variable rate back down to 6.5 per cent or even lower.

But Mr Oster warns the reduction of official interest rates is also a sign the RBA is very worried about how bad things are going to get especially on the global front.

This comes as almost $40 billion was wiped off the stock market after investors lost faith in the China rebound.

In heavy selling, the All Ordinaries index also collapsed 3.5 per cent to below 4000 points yesterday.