Saul Eslake tips another RBA rate cut, but wonders on its effectiveness

Lower interest rates may do nothing more than inflate property prices, according to Bank of America Merrill Lynch's Australian economist Saul Eslake.

Eslake suggests further cuts to the cash rate "may be relatively ineffective in directly stimulating improved levels of activity in the economy over the short-term".

However he is tipping a second 25 basis point cut to 2%.

Eslake predicts an increase in the median national dwelling price from an average $469,000 to $497,000 in 2015, along with debt metrics at levels not seen since the heady days before the onset of the global financial crisis.

"Indeed, on the majority of measures and metrics Australia's household debt level is already high compared to our own history and other developed nations," he said.

"The household sector holds more debt than the non-financial business sector and all levels of government combined.

"And as a proportion of GDP [it holds] more than any other comparable developed economy," he said.

Constraints on fiscal spending, the federal government's inability to push through budgetary reforms, and state governments' reluctance to sell public assets had added to pressure on the RBA, Eslake said.

"The RBA finds itself in a difficult position," he told the Australian Financial Review.

"Households with a mortgage continue to pay the same mortgage amount each month with only the principal and interest proportions altered," he said.

"In this way, lower interest rates have largely been cashflow neutral."