NAB tips 3rd rate cut this year, says economy is losing momentum

NAB believes the economy is weaker than the RBA has reported; now tips third rate cut in 2019.

NAB group chief economist Alan Oster

National Australia Bank is tipping an extra, third rate cut in late 2019 as it warns the Australian economy is losing momentum.

The rates prediction, first made last month by Westpac, comes after a rate cut to 1.25 per cent earlier this month, and widely-accepted expectations of a further cut in July or August.

“Our judgment that the economy is losing momentum and is weaker than reflected in the Reserve Bank’s recently downgraded near-term growth outlook,” the bank said, as it flagged a third cut late in the year that would take the RBA’s cash rate to 0.75 per cent.

Announcing its change of mind on the outlook for the cash rate, NAB said it was “tentatively” timing the third 2019 rate cut for November.

NAB said it expected lower interest rates would be supported by fiscal stimulus later in the year.

“We would not rule out the possibility of alternative monetary action in early 2020, in addition to further rate cuts, if the economy remains very subdued, but have not put it into our projections.”

NAB’s move was prompted by trend deterioration in the NAB survey, released on Tuesday, along with recent weaker-than-expected first quarter GDP figures and likely weak second quarter growth data.

Jobs data released on Thursday showed an uptick in employment numbers, but a steady unemployment rate prompted by a record participation rate of 66 per cent.

NAB said the loss of momentum was apparent in private demand, “which has barely grown over the past year, and more timely indicators, such as the NAB business survey and internal data, which point to a weaker labour market and entrenched weakness in spending”.

It said the unemployment rate is likely to rise further and could reach 5.5 per cent next year, adding to “already considerable spare capacity in the economy”.

That could result in inflation undershooting the RBA’s 2-3 per cent target band until mid-2021, NAB said.

The bank said the question of a July or August cut was “very hard - and to a large extent is less relevant for the economic outlook”.

“On the one hand given a starting point problem (ie the economy is weaker than the RBA expected and continues to lose momentum) the RBA should probably get on with the cutting cycle.

“On the other hand, there does seem to have been a post-election boost to confidence and it is too early to assess if that has flowed into activity in any sustained way.

“Also back-to-back cuts could send a strong signal that the economy has bigger problems than we thought.”

NAB said while it had opted to stay with its August rate cut forecast, it would not be surprised by a July move.

“It is, in short, a very finely balanced judgment.”

NAB said RBA “optimism” had been challenged by weak GDP figures and business survey trends.

“We expect the bank will be forced to change its narrative as the year progresses, downgrading its forecasts to bring them closer to our own outlook of subpar growth, rising unemployment and persistently low inflation.”

Westpac late last month broke with other economists to forecast a third rate cut to 0.75 per cent by November, citing stalled wages growth, well-below-target inflation and the RBA’s tepid economic forecasts.