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Two more rate cuts say NAB

National Australia Bank’s (ASX: NAB) chief economist, Alan Oster, says that he expects two more rate cuts this year to take the official cash rate to an all-time low of 2.5%.

Speaking at a NAB Private Wealth seminar in Sydney, Mr Oster said he could see the Reserve Bank cutting rates around mid-year and then one later, given the current economic outlook.

He suggested that there were two key influences on how the official cash rate would move. If unemployment shows signs of moving significantly higher, then rates would keep dropping, while house prices were the other key factor. Rising house prices could see the RBA inch rates higher, rather than down.

Unemployment rose to 5.6% in March, its highest level in three and a half years, with the economy losing 36,000 positions, reversing half the gains from the previous month. The participation rate also fell to 65.1% in March. Analysts say the overall trend is that unemployment is rising, suggesting the economy is growing at below average pace. Business surveys show hiring intentions are weak, and the Australian Bureau of Statistics (ABS) survey of job vacancies is falling at a rapid pace.

Last week, ABS reported that retail sales data climbed 1.3% in February, which suggests the retail sector is gradually improving. Building approvals also rose in February, and house prices recently posted their biggest gain in three years, but construction statistics fell for the 34th consecutive month, suggesting that all is not so rosy in the housing sector.

Low interest rates, combined with rising house prices and rents suggest that investors were driving the rise in house prices, which may concern the RBA, as the central bank doesn’t want to see a housing bubble.

The major banks including NAB, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA) and Westpac Banking Corporation (ASX: WBC) have seen credit growth drop since the global financial crisis, despite controlling an estimated 93% of the mortgage market. The mixed results in the housing industry won’t be pleasing them much, and further interest rate cuts could be a spur to drive credit growth.

Foolish takeaway

With the resources boom slowly fading and other sectors of the market expected to pick up the shortfall, further rate cuts may be needed, but for now, the RBA is sitting on its hands to see how things play out.

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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