NAB ditches 2017 rate cut forecast

NAB has abandoned predictions of another rate cut this year as Sydney and Melbourne house prices “defy belief”.

The NAB now expects the Reserve Bank to keep the cash rate at 1.5 per cent throughout 2017. Pic: AAP

National Australia Bank has revised its rates outlook for the second month in succession, binning the prospect of a further rate cut from its forecast as house prices in Sydney and Melbourne “defy belief”.

In a statement today, the bank’s economics team said it now anticipated the Reserve Bank to keep the cash rate at 1.5 per cent throughout 2017.

It represents a departure from a view offered last month that the RBA will make a further 25 basis point cut in November this year.

That position in itself had represented a change from an earlier projection for two rate cuts in 2017.

“The RBA is becoming increasingly focused on financial stability considerations, particularly household balance sheets in the context of a re-acceleration in house price growth in Sydney and Melbourne amidst elevated levels of household debt,” NAB chief economist Alan Oster said.

“Recent comments from RBA officials raise the possibility that macro-prudential measures may be stepped up and we now consider a further rate cut as unlikely in this environment.”

While the bank has removed the prospect of a 2017 rate cut from its base view, it believes talk of a rate hike remains premature as it expects growth and the labour market to be subdued into 2018.

As a result it expects the risks to rates remain tilted toward the downside at the current time.

The key to NAB’s revised views on the RBA is the housing market, and more specifically, conditions in the two heavyweight cities of Sydney and Melbourne, where prices have continued to accelerate over the past year.

“The housing markets in Sydney and Melbourne continue to defy belief in 2017, with property prices showing no real signs of slowing despite tightening credit conditions and concerns about affordability,” Mr Oster said.

“Indeed, housing finance has remained strong, especially for investors. Auction volumes are also solid, and auction clearance rates are up from the levels seen at the same time last year — suggesting the markets remain tight.

“Elsewhere, price movements were relatively mixed in February, but the trends have generally been fairly positive in most markets. Even Perth prices have been showing signs of stabilisation.”

NAB also slightly altered its view on the Australian dollar, lifting its 2018 forecast to US70 cents, from US68-US69c previously. It left its 2017 year-end projection at US70c.