High unemployment and weak consumer and business sentiment warrant a cut in interest rates by the Reserve Bank of Australia, investment bank Credit Suisse says in a note published on Monday.
Research analysts Damien Boey and Hasan Tevfik say the current cash rate of 2.5 per cent is too high considering broad softness in the economy.
"We believe that the RBA is not done with its easing cycle," they wrote. "We think that the bank needs to cut rates below 2 per cent."
Boey and Tevfik are the latest economists to highlight the Reserve Bank of Australia's current dilemma: it cannot ease monetary policy to encourage more spending and investment without adding fuel to the already-overheated Sydney and Melbourne property markets.
Bank of America Merrill Lynch's chief Australian economist Saul Eslake also argues in a recent note that dwelling price growth would continue cooling anyway, and this could further stunt non-resource investment and consumer sentiment.
"Part of the reason why economists have stopped forecasting easier policy is because rates are already at historically low levels," Credit Suisse said on Monday.
"One school of thought is that the RBA would like to preserve some rate cut ammunition.
"Another is that there are financial stability risks from extremely low rates or even signalling that rates could fall further," the bank said.
"The recent pick-up in housing activity, led by investors, arguably supports this view."
Despite this, a growing list of economists have gradually pushed out forecasts for the RBA to start tightening monetary policy, with most now predicting an initial rate rise in late-2015 or early-2016.
A few, including Deutsche Bank and Goldman Sachs, have not dismissed the possibility of a further cut.
Credit Suisse says its modelling suggests the cash rate needs to fall slightly below 1.5 per cent to address current weakness in the Australian economy.
It argues current bond and money market rates suggest monetary tightening is off the cards in any case, and have started to price in an interest rate cut.
"Private sector confidence has declined to below-average levels consistent with weak growth," Credit Suisse says.
"The unemployment rate has risen to a cyclical high of 6.2 per cent and is still increasing, consistent with rising spare capacity and subdued inflationary pressure.
"We believe that the model is telling us about the Australian economy's struggles to adjust to a post-mining boom in a post-Global Financial Crisis world," the bank says.
