Two rate cuts by Christmas?

Late yesterday, National Australia Bank (ASX: NAB) revised its expectations for rate cuts by the Reserve Bank of Australia (RBA). Adding its voice to the growing body of economist and market participants who believe the Australian economy is rapidly slowing, the NAB now expects two rate cuts of 0.25% each in August and November, bringing the cash rate down to 2.25% before the end of the calendar year.

The NAB increased its rate cut expectations from one cut to two due to weak domestic demand, the downturn in mining investment and RBA Governor Glenn Stevens’ “sober and realistic outlook, suggesting that the economy cannot rely on housing and consumption to plug the growth hole.”

While borrowers – who benefit from lower interest rates – will no doubt view the rate cuts as an early Christmas present, there is a downside too. As the bank states, it “expect[s] the Australian economy will continue to grow below trend, income growth to be weak, and the unemployment rate to rise.” An economy faced with these headwinds benefits very few, borrowers included.

To sum up what the NAB expects the economy to look like into 2014, this hypothetical question posed by the bank captures its expectations: “what will the economy look like next year? We are not optimistic.”

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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