Major bank now anticipates earlier cash rate cut
National Australia Bank (NAB) has updated its forecast for the Reserve Bank of Australia (RBA) to begin cutting interest rates in February 2025, three months earlier than its previous expectation of May 2025.
The bank predicts a steady pace of rate reductions, with one cut per quarter, bringing the cash rate down to 3.10% by early 2026.
NAB’s updated view comes as domestic inflation pressures show signs of easing, albeit gradually. Despite this, the bank does not foresee conditions for a rate cut materialising this year. The revised forecast acknowledges a shift in the balance of risks, which could allow the RBA to feel more confident in easing monetary policy sooner than anticipated.
“The risks have been skewed to a first cut earlier in 2025, and today’s change reflects that shift,” said Alan Oster (pictured above), group chief economist at NAB. “We still expect the RBA’s cuts to be later and shallower than those of many peer central banks.”
NAB’s overall economic outlook remains largely unchanged, with the bank expecting the Australian economy to recover modestly. Growth in the first half of this year is likely to have marked the bottom, but NAB forecasts a slower rebound than the RBA. The unemployment rate is expected to rise slightly before stabilising around 4.5%.
Elevated inflation, largely driven by housing and persistent domestic cost pressures, is expected to ease as capacity constraints loosen and demand growth remains soft. NAB forecasts underlying inflation to slow to 2.6% in 2025.
Oster noted that while growth in Australia has been sluggish, the economy is still adjusting from the post-pandemic boom.
“Growth in Australia is slow, weighed down by private demand and a pullback in household spending due to cost-of-living pressures,” he said. “However, domestic final demand remains 12.6% higher than pre-pandemic levels, and household consumption has been relatively resilient.”
NAB also pointed out that inflationary pressures have begun to recede, with capacity constraints easing substantially from their peaks. However, these pressures remain elevated in some areas.
Oster expects the RBA to begin cutting rates in February, assuming the central bank sees sufficient evidence of weakening demand driving down inflation. In June, NAB also revised its forecast for the RBA cash rate movement, predicting that the central bank would hold interest rates until the first rate cut in May 2025 – a delay from its previous projection of November 2024.
“The RBA tightening phase was more gradual and shallower than many of their global counterparts,” Oster said. “As a result, they have less space to adjust the level of restriction, but we expect that by February, they will have seen enough to begin cutting rates.”
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