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.