NAB has brought forward its forecasts for interest rate hikes based on the stronger than expected performance of the Australian economy.
While the bank’s economists previously predicted that the RBA would begin to raise rates in November, the first rate hike is now expected to take place in August with additional rises in September and November bringing the cash rate to 0.75 per cent.
A further six hikes are then forecast to take place throughout 2023 and 2024 which will see the cash rate reach about 2.25 per cent by the end of 2024.
“Our expectation is for the RBA to take a cautious approach to normalising monetary policy, with interest rates to rise gradually over an extended period as occurred in the first phase of the mining boom,” NAB said.
“Policy makers will be wary of the impact of higher rates on cash flows, and a gradual approach will ensure low unemployment and strong income growth allow households and businesses to deal with higher interest rates.”
The war between Russia and Ukraine is a “key uncertainty” to the bank’s economic forecasts with the possibility of rising commodity prices taking a toll on the global economy as well as consumer and business confidence.
“This backdrop supports a gradual normalisation of policy in the near-term and the RBA could choose to wait longer to see how the situation plays out and how inflation and wages evolve,” NAB suggested.
“The RBA could also choose to experiment by running the economy hotter for longer with the goal of seeing the unemployment rate fall even lower.”
NAB noted there was also the potential that the RBA may choose to raise interest rates earlier than anticipated on the back of high inflation readings expected over the near term.
“However, given the timing of official data releases, the federal election expected in May, and the uncertainty around the Russia-Ukraine conflict we see this as a small risk,” the bank said.
According to NAB’s upgraded predictions, unemployment is set to drop below 4 per cent in March this year, earlier than the RBA’s own forecasts which put unemployment at 4 per cent in June and 3.75 per cent by the end of 2022.
Underlying inflation of 1 per cent has been forecast by NAB for both the first and second quarters of this year, which would bring core inflation to about 3.75 per cent versus the RBA’s forecasts of 3.25 per cent.
“We expect that by August – after the release of the Q2 CPI data – the RBA will have sufficient evidence of very low unemployment, strong inflation and progress on wages to begin the process of normalising rates, starting with a 15bp increase to life the cash rate target to 0.25 per cent,” NAB said.
GDP growth of about 3.5 per cent is forecast by the bank for 2022 before of a decline to 2.1 per cent during 2023.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
