National Australia Bank brings forward RBA interest rate cut to February
One of the country’s largest banks says that the Reserve Bank will be in a position to offer rate relief to millions of Australians sooner than expected.
National Australia Bank has brought forward its expectations for the first interest rate cut from the Reserve Bank to February as economic indicators suggest that inflation is slowly returning to target.
The banking major previously forecasted that the central bank would not be able to deliver mortgage relief to households until May, but said on Tuesday that the change in timing largely reflects the shifting balance of risks on inflation.
The shift by NAB puts it in lockstep with ANZ and Westpac, which both have pencilled in a rate cut from 4.35 per cent at the RBA’s first board meeting of 2025 in February. Commonwealth Bank expects the RBA to ease rates from December.
NAB head of Australian economics Gareth Spence says the bank expected to see a gradual pace of cuts back to 3.10 per cent by early 2026 with it successfully able to navigate the challenge of returning inflation to the middle of its 2-3 per cent target and retain most of the gains in the labour market over recent years.
“This profile for the cash rate sees the RBA cautiously normalising policy settings back to neutral in an environment in which inflation has subsided, but the labour market remains close to full employment and GDP growth is recovering towards trend,” he said.
“That would mark a very soft landing, with economic and employment growth remaining positive. It also implies a later and slower pace of cuts back towards neutral when compared with many other advanced economy central banks – in part reflecting a less restrictive starting point as inflation returns to target.”
A cash rate of 3.1 per cent would reduce interest rates by 125 percentage points and be the equivalent of five, 25 basis point cuts. Analysis from RateCity.com.au suggests that each rate cut is worth about $75 off the cost of a mortgage on a typical $500,000 loan per month and $149 on a $1m loan.
The RBA removed the explicit consideration of a further increase at the September meeting, noting that the current level of the cash rate was sufficient to balance the risks of inflation taking longer than expected to return to target against the risk of a more significant downturn in the labour market.
Mr Spence said that the RBA would not be in a position to cut the official cash rate in November or December because inflation at this stage remained too high and other indicators pointed to an imbalance in supply and demand.
“While growth is very slow and will likely finish the year around 1 per cent, underlying
inflation remains above the RBA’s target band and a range of indicators – including capacity utilisation in the NAB Business Survey – suggest the balance of supply and demand is still tighter than normal,” he said.
NAB said that September quarter inflation data due at the end of the month will be impacted by subsidy effects such as power bill rebates at both state and federal levels, but the detail should show steady progress on inflation with trimmed mean expected to print at 3.5 per cent for the year.
“There are encouraging signs on wage growth and rental vacancies that temper the upside risks to the inflation outlook, but we expect the RBA will want more evidence – likely in the December quarter CPI print,” Mr Spence said.
The labour market continued to evolve in line with, or slightly better than, NAB had expected.
The rise in unemployment has been driven by supply with employment growth remaining robust, and the bank expected this to continue in coming months before stabilising around 4.5 per cent in 2025.
On this trajectory, the labour market would not be an impediment to the RBA commencing a rate cutting cycle, but NAB said nor would it generate pressure to rapidly ease policy settings.
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