The economics team at National Australia Bank Ltd (ASX: NAB) has updated its forecast timing for the first interest rate cut to May next year.
Let's find out why.
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NAB says first interest rate cut likely in May 2025
NAB now expects the Reserve Bank of Australia (RBA) to cut the official interest rate by 25 basis points to 4.1% in May next year.
In its monthly newsletter, the NAB economics team explained:
The key change to our forecasts over the past month was the shift on our view for the timing of the first RBA rate cut.
We now expect the first cut to occur in May 2025 – though we still expect the RBA to ultimately cut rates by 125bps over the subsequent year or so.
We acknowledge the upside risks to rates in the near-term, but we ultimately see the RBA maintaining its strategy of trying to hold onto labour market gains. That sees the need to remain on hold for longer.
Other analysts reckon the first interest rate cut will be even later in 2025.
Senior economist at Westpac Banking Corp (ASX: WBC), Pat Bustamante commented today:
There is a 30% chance of an RBA rate hike priced in for 2024 with around a 25% chance of a hike at the August meeting. Markets have pushed out the first full rate cut to August next year.
Will rates keep falling after the first cut?
NAB forecasts interest rates to continue falling after its forecast first cut in May.
Looking at the longer term, the bank predicts a 25-basis-point cut in the September 2025 quarter, the December 2025 quarter, the March 2026 quarter, and the June 2026 quarter.
By then, the official cash rate will be 3.1%. NAB expects it to stay there until the end of 2026.
What's ahead for inflation, jobs and economic growth?
The RBA pays much closer attention to changes in the quarterly rate of inflation to help them make decisions on interest rates.
The next lot of quarterly data will be published by the Australian Bureau of Statistics next Wednesday 31 July.
NAB is expecting a 1% quarter-on-quarter increase in inflation. This would take annual inflation to 4% for the trimmed mean rate and 3.8% for the headline rate.
Gareth Spence, NAB's Head of Australian Economics, said:
Inflation has remained higher than we (and the RBA) expected, although the market services components of the monthly CPI indicator – though still high – show a clearer easing trend. That said, overall inflation remains important and has shown little further moderation in H1 2024.
Spence said he expects the unemployment rate to rise to about 4.5% by the end of 2024 and remain at that level throughout next year.
As has been our view for some time, this will largely reflect a cooling in labour demand amid still-strong population growth, rather than an outright decline in employment.
In seasonally adjusted terms, the jobless rate rose by less than 0.1% to 4.1% in June. This compares to 4% in May, 4.1% in April, and 3.8% in March.
Spence said economic growth would likely remain well below the trend rate of 2.25% in 2024.
He expects economic growth to improve to about 2.25% over 2025 and 2026.
