NAB goes first, says no rate cut from the RBA in May

The NAB has become the first major forecaster to predict no change in interest rates by the RBA at the May Board meeting.

In a joint note between the bank economics team, including Alan Oster, Peter Jolly in global markets research, FX-Strategy head Ray Attrill and chief economist Markets Ivan Colhoun, the NAB highlights that Australia’s domestic economy is looking stronger than previously forecast.

“Recent readings on retail sales, dwelling investment, and business conditions have all improved and have led us to revise up our near term domestic demand forecast modestly,” the NAB economics said.

Likewise the NAB believes that there is “evidence that prior rates cuts are continuing to gain some traction. Employment outcomes have also been better and the ABS’s measure of the unemployment rate fell to 6.1% in March from 6.3% in January.”

Of course the other side to the argument, as the NAB notes, is that business conditions remain subdued and commodity prices are pressuring national income.

“In our forecast these forces have basically offset and leave GDP growing close to, but a little below, the trend growth rate of 3% in the year ahead,” the NAB says.

That’s good news and it means – after RBA Governor Glenn Stevens highlighted he was concerned about household leverage, super low-interest rates and rising asset/house prices – that central bank is likely to sit pat on May 5.

Taking all these factors into account, we expect it would be prudent for the RBA to again hold the cash rate at 2.25% on May 5 but again signal they are prepared to cut the cash rate further if that would sustainably lift economic growth. If the unemployment rate resumes its rise, as we expect, they will need to act on this easing bias and we have tentatively put a final 25bps cut to 2% into August.

So, no cut right now, but they’re still forecasting one later this year. However, don’t be surprised, if the economy moves along the path the NAB is expecting, to see any cut disappear into late 2015 and maybe even vanish from forecasts for good.

As the NAB highlighted: “It’s also possible that we continue to be pleasantly surprised by the economy which would allow the RBA to hold the cash rate at 2.25%.”

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