The National Australia Bank (NAB) has done a complete about-face when it comes the outlook for Australian interest rates, forecasting that the RBA will now hike rates four times before the end of 2019.
Stronger employment, GDP and investment data have seen us revise our forecasts lower for unemployment, and slightly increase our forecasts for GDP growth and inflation. GDP growth will continue to build in late 2017, as LNG exports continue to surge and government spending remains strong. We still expect growth momentum to ease somewhat through 2018 and 2019 to around 2.5% — which is in line with NAB’s estimates of potential growth — although domestic demand is a bit higher in 2019. The forecast changes are largely due to a stronger labour market which feeds into slightly higher wages growth. The unemployment rate is forecast to ease to 5.4% by end-2017, 5.3% by end-18 and 5.1% by end-19.
Here are the NAB’s updated Australian economic forecasts.
Given those expectations, the NAB says it should be enough to give the RBA greater confidence that inflation will return to the lower portion of the target band, seeing the bank hike rates twice next year and twice again in 2019, leaving the cash rate at 2.5%.
While we remain cautious about aspects of the economic outlook, we now believe the labour market will strengthen enough to allow the RBA to remove some of the emergency stimulus currently in place. We are pencilling in rate rises of 25bps [basis points] in August and November of 2018 and a further two 25bp hikes in 2019, although the precise path will be data dependent. A cash rate of 2.5% by end-19 is still well below the RBA’s estimates of neutral, suggesting monetary policy will remain supportive of the economy.
Earlier this year, the NAB was forecasting two rate cuts from the RBA in 2017. It subsequently changed that forecast to one further cut before completely abandoning its call for further easing in March.
The move from the NAB breaks ranks from Australia’s other big 4 bank’s — the CBA, Westpac and ANZ — who are all currently forecasting that rates will remain unchanged until at least late 2018 or longer.