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NAB tips the RBA to cut the cash rate to 0.25% in 2020

On Tuesday the Reserve Bank of Australia elected to leave the cash rate unchanged at 0.75%.

But according to one leading economist, it might not be long before the central bank makes its next move.

According to an economic note by National Australia Bank Ltd (ASX: NAB), its chief economist Alan Oster believes there are two more rate cuts to come.

Oster explained: “We have included an additional 25bp cut to the cash rate in our rate track. We now expect cuts in both February and June 2020 – taking the cash rate to 0.25%.”

“At this point, we see an increased risk of a move to ‘unconventional’ policy in H2 2020 should the labour market deteriorate more significantly than we forecast, with low inflation posing little constraint to further easing. Previously, we had pencilled in only a further 25bp cut to the cash rate and hoped to see a material support from fiscal policy, which now looks unlikely in the required timeframe.”

The chief economist believes that policy makers need to do more and suspects the Reserve Bank could move to quantitative easing in the second half of 2020.

He said: “Our forecasts of below-trend growth, a deterioration in the unemployment rate and inflation firmly below the RBA’s target band are broadly unchanged, but clearly imply the need for policy makers to do more. Weak private-sector growth is likely to see employment growth slow and unemployment drift further above the NAIRU, cementing weak wages growth.”

“Indeed, our forecasts for the household sector and business investment are notably weaker than the RBA’s, although we remain more optimistic on public spending. Should the data turn out weaker than our forecasts, there is a real prospect the RBA moves to unconventional policy in H2 2020,” Oster concluded.

What now?

If NAB’s predictions prove accurate, then it looks set to be a tough few years for income investors.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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