NAB ups its cash rate forecast

The 2023–24 federal budget made little impact on the four major banks’ economists monetary policy forecasts, with the budget forecasts remaining fairly “neutral”.

As it stands, NAB and ANZ are forecasting 4.1 per cent to be the peak in the cash rate around July or August, while Westpac broadly calls another lift in August, and the Commonwealth Bank (CBA) leans towards the end of the rate hiking cycle with a peak of 3.85 per cent.

However, there remained a real prospect of the cash rate hitting 4.35 per cent if deemed necessary to balance the risks to the economy from stubborn inflation.

While NAB and Westpac have remained slightly more hesitant to make their calls after the May hike took many by surprise, NAB said its revised forecast was “not a response to the recent federal budget”, which they regard as “broadly neutral in terms of its effects on inflation and implications for monetary policy”.

“The key uncertainty for our rate expectations has been the reaction function of the RBA, and monetary policy strategy of the RBA has been marked by some mixed signals in 2023,” NAB’s chief economist Alan Oster said.

“However, it is clear that the near-term balance of risks on inflation remains to the upside, and the RBA is forecasting inflation to only return to the top of the target band by mid-2025.”

“At least one additional rate rise is likely to be necessary to limit the risk this timeline slips any further.”

However, he added the bank hasn’t ruled out the “prospect of an additional rise to 4.35 per cent if the data stays stronger for longer.”

“We continue to expect the cash rate to return to a more neutral setting of 3.1 per cent by mid-2024 as this slowdown takes hold.”

Economy expected to slow

The government’s latest GDP expectations are for the economy to grow below trend over each of the next two years at 1.5 per cent (2023–24) and 2.25 per cent (2024–25).

Mr Oster noted these forecasts were fairly optimistic and expects that as higher rates pass through to household cash flows and the wider economy, the economy will begin to slow more noticeably in the second half of 2023 and into 2024, seeing annual GDP growth slow to below 1 per cent and the unemployment rate begin to rise, reaching around 4.7 per cent in 2024.

“This makes it an increasingly difficult balancing act for the RBA to manage inflation lower without slowing the economy too much.”

While ANZ and Westpac’s economists agree the budget doesn’t pose any immediate risk to rates, Westpac chief economist Bill Evans said the forecast “underestimates the likely weakness in the real economy” that they expect to fall to 0.9 per cent in GDP in 2023–24.

Mr Evans said this expected slowdown was an “important dimension of the interest rate debate”, but it was unlikely to be a factor in the central bank’s deliberations until the August Board meeting, when economic forecasts become clearer.

“The issues of importance for that meeting will continue to be the unemployment rate; the extent to which underlying inflation has fallen during the June quarter; global developments, and the overall state of the economy,” Mr Evan said.

“We expect that evidence of the economic slowdown will be much clearer in August and, globally, central banks will be on hold.”

In addition, ANZ expects another 25-basis-point rate rise in August, taking the cash rate to a peak of 4.1 per cent, while the CBA calls an end to the tightening cycle with a terminal cash rate of 3.85 per cent.

[Related: Budget forecasts questioned by economists]