'Growth appears to have lost significant momentum': NAB becomes the latest member of the RBA rate cut club

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  • The National Australia Bank (NAB) now see two rate cuts from the RBA this year. It says there may be even more cuts to come in 2020.
  • The NAB joins Westpac in forecasting rate cuts this year. Both the Commonwealth and ANZ still have rates remaining on hold, for the moment.
  • Financial markets are fully priced for a 25 basis point reduction in the cash rate, with the risk of a second also being priced in.
  • Outside of jobs and trade data, it’s been slim pickings for good news on the Australian economy recently.

The National Australia Bank (NAB) has joined the growing ranks of forecasters who expect the Reserve Bank of Australia (RBA) will cut interest rates this year.

“We now think that the RBA will make two rate cuts in 2019,” said Alan Oster, Chief Economist at the NAB.

“Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and financial stability risks have abated.

“We have pencilled in one 25 basis point cut to 1.25% in July and a further 25 basis cut to 1% in November.”

Along with official data released recently, including Australia’s Q4 GDP report earlier this week, Oster said the decision to change the NAB’s view was driven by recent trends in the its monthly business survey.

“If, as we expect, the loss of momentum in private-sector activity seen in the second half of 2018 continues, then there is unlikely to be much improvement in the labour market despite its resilience to date,” he said.

“This view is reinforced by the forward indicators in the survey pointing to continuing, if not further, weakening.”

And Oster says the RBA may not stop at two cuts if the economy requires it.

“With monetary policy being forward looking, we think the RBA will act this year on a ‘no regrets’ basis to boost economic activity and to offset a likely increase in unemployment in 2020,” he said.

“It is possible that further policy adjustment will be required in 2020.”

Of Australia’s big four banks, only the Commonwealth and ANZ still sees Australia’s cash rate remaining unchanged this year.

Like the NAB, Westpac also sees two 25 basis point rate cuts arriving this year. Other forecasters such as Market Economics, Capital Economics, Nomura, UBS, J.P. Morgan and Macquarie also share this view.

Financial markets are fully priced for a 25 basis point reduction in the cash rate this year, along with the growing risk of a second.

Outside of Australian labour market and trade data, it’s been slim pickings for good news on the economy over the past few months.

After growing by just 0.3% in the September quarter, Australia’s economy slowed even further in the final three months of 2018, expanding by a paltry 0.2%.

Recent PMI reports released by the Ai Group suggest that slowdown has since continued in early 2019, adding to upside risks for unemployment and downside risks for inflation — the two triggers nominated by the RBA as possible catalysts that could warrant further monetary policy stimulus.

Retail sales in January were also weak, growing by just 0.1%, adding to concerns about the outlook for household spending, the largest part of the Australian economy.

Residential building activity is also starting to roll over, mirroring trends in home prices beforehand, creating additional downside risks for both the economy and employment growth.

NOW READ: Why every RBA meeting is now live for a potential cut

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