Updated July 20, 2017 15:25:28

Photo: Going down? Would a rise in the RBA's cash rate crush household spending? (ABC News: Stephen Letts)

A shift in official cash rates to the Reserve Bank's "new neutral" of 3.5 per cent would drive household consumption down to recessionary levels according to Deutsche Bank.

Indeed, Deutsche Bank's chief economist Adam Boyton said just half the move to neutral - that is just 1 percentage point on top of the current 1.5 per cent cash rate - would be enough do the job.

"We estimate 100 basis points of rate hikes over 2018 and 2019 would sink household consumption growth to levels part-way between a mid-cycle slowdown and a genuine recession," Mr Boyton wrote in a note to clients.

The RBA's July board meeting minutes - released earlier this week - noted members had discussed the new setting of the "neutral nominal cash rate" of 3.5 per cent was appropriate to keep economic growth at its potential and inflation stable.

Deutsche Bank modelling found a 1 percentage point increase - the equivalent of four RBA rate hikes - would send household consumption growth tumbling to an annualised pace of 1 per cent, well below the current tepid pace of just over 2 per cent.

Even then, Deutsche Bank made some generous assumptions, such as household income growth at 5.5 per cent - more than double its current rate - and no more "out-of-cycle" independent rate rises from the banks.

Some economists see the Reserve Bank hiking interest rates before the end of the year. Ian Verrender reckons they're dreaming.

Deutsche Bank's conclusion is that the RBA's research department has got it wrong, considering the stretched conditions households find themselves in with high debt and low wage growth.

"In fact, if we consider the concept of a neutral cash rate from the current perspective of the household sector - namely, what cash rate takes our measure of household financial obligations to its long-run average - then the answer is currently around 1.75 per cent," Mr Boyton argued.

Mr Boyton said getting to the RBA's 3.5 per cent neutral rate was "years down the track", and even then only possible if the US Federal Reserve can get back to its neutral stance of 3 per cent.

Last month the Fed raised its short-term target rate to the 1-to-1.25 per cent band, despite on-going low inflation and economic growth slowing again.

"We remain of the view that the weakness in the consumer sector in Australia is likely to persist for some time and continue to struggle to see the RBA hiking next year," he concluded.

Photo: Deutsche Bank argues a 1 percentage point rise in the cash rate would drive household spending towards recessionary levels. (Supplied: Deutsche Bank)

Topics: economic-trends, money-and-monetary-policy, australia

First posted July 20, 2017 14:16:29