NAB now sees only one rate cut from the RBA in 2017

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On the back of Tuesday’s incredibly strong Australian business confidence survey for January, the National Australia Bank (NAB) has tweaked its forecasts for the RBA cash rate, pushing back the timing, and scale, of cuts in the year ahead.

Here’s the basis for the bank’s change of heart:

Economic activity is likely to be solid as we enter 2017. Real GDP in Q4 2016 is likely to print at a strong 0.9% q/q, following the 0.5% q/q contraction in the Q3. Meanwhile, business conditions have turned up in December and January, suggesting the soft patch through much of H2 2016 was a ‘mid-cycle’ loss of momentum as we had suspected. Through the remainder of 2017, quarterly growth outcomes are likely to be solid, with the drag from mining investment reducing, LNG exports adding strongly to growth and the global backdrop somewhat more supportive. This will see the year-ended pace of growth pick up to over 3% by Q3 2017, although the annual average pace of growth for 2017 will be lower at 2.3%.

This pick up in momentum will keep the RBA on the sidelines through much of 2017, and we no longer expect rate cuts around the middle of the year. We do however remain concerned about the economy’s trajectory in 2018, as the contribution from residential construction, LNG exports and temporarily higher commodity prices fade and household consumption remains constrained by weak labour income growth – our year-ended growth forecasts drop to 2% by Q4 2018.

As a result, the NAB now expects only one rate cut from the RBA in 2017, forecasting the cash rate will fall to 1.25% at the RBA’s November policy meeting.

“(This will be) necessary to help prevent the unemployment rate from rising and underlying inflation from undershooting the bottom of the target in 2018,” it says.

Previously the NAB was forecasting two rate cuts from the RBA in 2017, one in May and again in August, taking the cash rate to 1%.

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