Westpac Banking Corp has revised down its interest rate forecast.

It now sees the Reserve Bank of Australia (RBA) cash rate falling to a low of 3.50 per cent, instead of four per cent, next year.

“In these turbulent times we reserve the right to be more flexible with our rate calls than in more normal times,” global head of economics Bill Evans said.

“We have revised down our call for the low point in this RBA cycle to 3.5 per cent from four per cent.”

Debt futures markets are currently pricing in a cash rate of 3.25 per cent for as early as March 2009.

The cash rate currently stands at 5.25 per cent.

Mr Evans said key to Westpac’s revision was household and business lending rates.

While the RBA had cut the official rate by 125 basis points over September and October, household lending rates had only fallen by 73 basis points and business rates by 70 basis points.

“The transmission mechanism of monetary policy to household and business rates is being blunted,” Mr Evans said.

“All this means that for any given RBA cash rate the effective rate is higher than before the crisis.

“A 3.5 per cent target is entirely reasonable and a decision [by the RBA] to cut by 75 basis points on December 2, particularly with no meeting in January, is sensible.”

AAP