The NAB is now forecasting a rate cut in May

Photo by Michael Dodge/Getty Images

Australia’s weak March quarter inflation report has been a game-changer when it comes to the outlook for Australian interest rates.

Traders are now betting on a rate cut next week, and they’ve now been joined by the NAB’s economic team who have joined them in calling for a 25bps reduction.

“We assess this as a 55%/45% chance reflecting the Bank’s ability to do slightly more to reduce Australia’s unemployment rate given the very low inflation situation in Australia revealed by today’s very low core CPI outcome,” said Alan Oster, chief economist of the NAB in a note late on Wednesday.

“That said we remain generally optimistic about the near-term performance of the Australian economy and labour market, especially on the east coast of Australia. It is really a fine judgment about the lack of risk in adding a touch of stimulus given low inflation.

“As NAB starts to extend its economic forecasts towards 2018, the outlook suggests less upward pressure on interest rates as the housing cycle wanes, the boost from LNG exports eases and the positive effects from the lower $A subside. As a consequence we are also reviewing our forecasts for cash rate increases previously predicted in 2017.”

Previously the NAB had interest rates on hold this year, a forecast it shared with Australia’s other major lenders CBA, Westpac and ANZ.

It will be interesting to see whether the NAB’s forecast change will be the first of many.