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RBA to raise rates by 25bps in August: NAB

The major bank believes that the Reserve Bank of Australia will raise the cash rate by 25 basis points in August and November.

According to NAB’s December edition of the Forward View report, the RBA will not have much impetus to begin hiking the cash rate until it sees a pick-up in wages growth, which looks to start improving thanks to a stronger labour market.

“The RBA will be reluctant to raise rates until there are reliable signs that wages growth and inflation are moving in the right direction, especially as the cooling housing market has simultaneously lessened the urgency for RBA rate hikes,” the report said.

“However, we expect that stronger labour market conditions will see wage growth lift over time.”

NAB forecast that the unemployment rate would continue falling to 5.2 per cent towards the end of 2018 “as the labour market improves”. 

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“Further strength in employment growth will help to narrow the gap between business and household spending.

“On balance, for now, we retain our view that the RBA will begin gradually lifting interest rates in H2 2018 as the unemployment rate falls further.”

The report continues: “Underlying inflation is forecast to pick up slowly to 2 per cent by end-18, which, together with early evidence of a pick-up in wages growth, should be enough to see the RBA commence tightening in the second half. We have 25 bp hikes in August and November pencilled in. This would take the cash rate up to 2 per cent, a level which is still considered stimulatory.” 

However, the big four bank goes on to say that the RBA’s concerns about household balance sheets may not dissipate entirely, with household debt still expected to grow more quickly than household income. As such, it suggested that “further macro-prudential measures may be on the cards but are not factored in”.

The report reads: “Housing prices will be critical here, with hikes less assured in the unlikely event that housing prices experience a severe correction. On the flipside, a house price reacceleration may bring forward hikes and/or macro-prudential measures.” 

NAB’s forecast echoes that from HSBC, which also recently revealed that its central case is for the RBA to lift the cash rate “from mid-2018”.

Other economists are more conservative in their estimations, with AMP Capital’s chief economist, Shane Oliver, suggesting that the RBA will not raise rates until the end of 2018 “at the earliest”. 

[Related: RBA reveals cash rate decision]

RBA to raise rates by 25bps in August: NAB
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