May rate cut less likely

NAB has changed its forecast for the Reserve Bank’s next cash rate decision.

The major lender now expects the RBA will hold the cash rate steady at 2.25 per cent at its 5 May board meeting.

NAB said the better flow of recent data is the main reason for this change.

“Our forecast remains for a rising unemployment rate (albeit to a lower peak), which makes it likely they will still need to cut again,” NAB group chief economist Alan Oster said.

“We have pushed our forecasted final rate cut to 2 per cent to the August board meeting,” Mr Oster said, adding that exact timing will be determined by the flow of data.

“This change has promoted us to revise up our Australian dollar forecast modestly,” he said.

“We now forecast AUD being 0.78 at the end of Q215 and 0.76 to Q315. Previously these were 0.75 and 0.74. Our year-end forecast of 0.74 is unchanged.”

Mr Oster noted the challenges facing the Australian economy in yesterday’s revised RBA forecast.

Lower commodity prices continue to work through the economy via lower mining investment, weaker mining profits, and slower national income growth, he said.

“On the positive side, the non-mining economy has strengthened over the past year, helped by a very low cash rate and a lower AUD.”

Mr Oster noted RBA governor Glenn Stevens’ speech earlier this week, which implied that the cash rate already being at a super low level, household leverage being at an all-time high, and rising asset/house prices are all reasons to be cautious about reducing interest rates further.

Latest data on house prices suggest they continue to rise strongly in Sydney and more recently this has broadened to other cities, he noted.

“Taking all these factors into account, we expect it would be prudent for the RBA to again hold the cash rate at 2.25 per cent on 5 May but again signal they are prepared to cut the cash rate further if that would sustainably lift economic growth.”

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