NAB tips cash rate to fall to 1pc, suggests RBA may pursue quantitative easing

NAB expects a cash rate of 1pc and suggests the RBA may follow global central banks with quantitative easing.

NAB says the RBA may use non-conventional policy measures.

National Australia Bank has tipped a reduction in the official cash rate to 1 per cent and stunned markets by suggesting the Reserve Bank may even follow central banks around the world in pursuing quantitative easing (QE).

The commentary makes NAB the first of the nation’s most prominent forecasters to discuss the use of unconventional monetary policy as inflation fails to break out from levels last seen in the 1990s.

The outlook represents a stark contrast to its prior view the RBA would stand pat on rates for the foreseeable future, with NAB last week among the minority of forecasters expecting rates to remain on hold.

Instead, the central bank trimmed rates by 25 basis points to a record low 1.5 per cent.

The surrounding commentary from the RBA has sparked a rapid shift to NAB’s outlook, with two 25 basis point cuts now expected in 2017.

“Monetary policy deliberations may then turn to the possible use of non-conventional policy measures if the outlook deteriorates further,” NAB said in a note.

“Additionally, persistent weakness in CPI inflation could potentially trigger a rate cut even sooner than expected.”

NAB, led by chief economist Alan Oster, said the response to muted inflation from the RBA suggested the central bank remained confident lower rates could boost price pressures despite declining evidence of their efficacy.

The central bank’s reduced concerns about house prices also factored into NAB’s response.

“Although we are not as quiescent as the RBA with respect to house prices, nor are we convinced lower rates will have a material impact on inflation, we do expect the RBA will react by providing further support,” Mr Oster said in a note.

“This will include two more cuts in May and August 2017 (to a new low of 1 per cent), which should be enough to stabilise the unemployment rate … at just over 5.5 per cent and prevent economic growth from dropping below our forecast of 2.6 per cent (average) in 2018.”

NAB isn’t the only forecaster to tip rates at 1 per cent next year, with its prediction following similar calls from Morgan Stanley, Macquarie and Capital Economics.

NAB said the outlook for inflation was “very subdued” and it sees little barrier to falling rates as the RBA appears unconcerned about record lows.

“With inflation forecasts still very low and the RBA showing its hand as a committed ‘inflation targeter’, it is seemingly less worried than we thought about using up some of its valuable remaining monetary policy ammunition, the case for further cuts from the RBA appears to be mounting,” Mr Oster said.

The revision to NAB’s forecasts was not predicated on any major change to its near-term outlook for the general economy, although it did warn of rising risks heading into 2018 as the LNG boom fades and construction growth slows.

“NAB continues to see a reasonably solid economy in the near-term, supported by an improved non-mining economy (particularly with strong growth in residential construction) and increased hard commodity production,” the note read.

“However, the risks to the outlook going into 2018 are becoming increasingly apparent, as LNG exports flatten off at a high level and the dwelling construction cycle turns down.”

NAB foresees economic growth of 2.2 per cent over 2018, well short of the RBA’s expectation of 3 to 4 per cent growth.

It is this discrepancy that has the big four bank discussing the prospect of QE from the RBA in coming years.

The Australian dollar fell on the report, sliding to US76.35c at 12pm (AEST). The unit traded at US76.6c before an embargoed copy of the note was put out at 10.30am (AEST) and was at US76.45c when the embargo was lifted at 11.30am (AEST).