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Category: Money and Monetary Policy / Economic Trends

NAB tips two more rate cuts, despite solid business confidence

Tuesday, 9 Aug 2016 09:41:55 | Stephen Letts

The Reserve Bank is tipped to cut the cash rate to as low as 1 per cent. (AAP)

National Australia Bank has significantly changed its call on official interest rate movements, arguing the Reserve Bank is likely to make two more cuts to 1 per cent, with the possibility of introducing "unconventional" monetary policy if the outlook continues to deteriorate.

NAB's change in stance followed the RBA's 25-basis-point cut to 1.5 per cent last week, as well as the dovish sentiment in the official statement accompanying the cut.

The bank's chief economist Alan Oster said the outlook for inflation remains very subdued with underlying inflation expected to remain below the bottom of the 2 to 3 per cent target band until mid-2018.

While the NAB's July business survey found the economy was "reasonably solid economy in the near-term", the bank has a dimmer view than the RBA of prospects into the future.

The NAB has forecast GDP growth of 2.2 per cent by the end of 2018, compared the RBA's call of 3 to 4 per cent.

"The risks to the outlook going into 2018 are becoming increasingly apparent, as LNG exports flatten off at a high level and the dwelling construction cycle turns down," Mr Oster said.

"With inflation forecasts still very low and the RBA showing its hand as a committed 'inflation targeter', it is seemingly less worried than we thought about using up some of its valuable remaining monetary policy ammunition, the case for further cuts from the RBA appears to be mounting.

"Backing up the case for additional monetary policy support, in its recent Statement on Monetary Policy the RBA re-emphasised that house price risks had become less of a constraint on the decision to cut rates."

Mr Oster noted that, while he was not as relaxed as the RBA on house prices, or that lower rates will have a material impact on inflation, he expected the RBA would react by providing further support.

"This will include two more 25-basis-point cuts in May and August 2017 - to a new low of 1 per cent - which should be enough to stabilise the unemployment rate, which is currently a concern for the RBA, at just over 5.5 per cent," he added.

Mr Oster said monetary policy deliberations may then turn to the possible use of non-conventional policy measures if the outlook deteriorates further.

"Additionally, persistent weakness in CPI inflation could potentially trigger a rate cut even sooner than expected."

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