First cut expected in May next year
National Australia Bank (NAB) has revised its forecast for the Reserve Bank of Australia (RBA) cash rate movement, predicting that the central bank will hold interest rates steady for longer than previously expected.
NAB now anticipates the first rate cut in May 2025, a delay from the earlier projection of November 2024. From then, NAB expects a steady reduction of one cut per quarter, bringing the rate back to 3.1% by mid-2026.
“Economic growth has slowed significantly over the past year as the effects of monetary policy have flowed through, and the labour market has started gradually easing,” said Alan Oster (pictured above), group chief economist at NAB.
“However, progress on inflation has been slower than we (and the RBA) had expected with the May Monthly CPI indicator signalling upside risk pointing to our expectation for a Q2 trimmed-mean print of 0.9% quarter on quarter and 3.9% year on year.
“The mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a ‘lower for longer’ approach – a lower rate peak compared to other advanced economies, resulting in a longer period at that peak.”
According to Oster, it is possible that the RBA board will change course and raise rates at its August meeting, especially if the Q2 print exceeds expectations. However, with the labour market easing, he said it seems unlikely.
“RBA Governor Michele Bullock has repeatedly stated that the board is not ‘ruling anything in or out’ and with another strong print in Q2, they will have the option of adjusting their strategy and raising rates at the August meeting,” Oster said. “Indeed, as recently as January, we saw 4.6% as the likely rate peak.
“However, with nine months elapsed since the last hike, an August move would represent a significant course correction late in the cycle. Unless inflation deviates more considerably from the forecast path, we expect the board to stick to their existing approach.”
NAB said the RBA will only gain confidence to begin easing policy after several quarters of inflation aligning around the upper end of its target band, potentially by February, but more likely in May following the Q1 2025 CPI data.
“Inflation should continue to moderate towards the midpoint of the RBA’s target range through 2025 and 2026, though the path will likely be uneven,” Oster said. “This will see the focus shift back towards growth and the labour market, leading the RBA to continue bringing the cash rate back towards a more neutral level, which we see as around 3%. A slower pace of cuts, or higher end point, remains possible.”
With NAB revising its cash rate forecast, the Commonwealth Bank of Australia and Westpac remain the only banks among the big four still predicting a rate cut in November this year. ANZ anticipates the first cash rate cut in this cycle will take place in February 2025.
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