The next move in official interest rates will be down, experts at National Australia Bank Ltd (ASX: NAB) say, following a weakening of economic data in recent months.
The Reserve Bank of Australia (RBA) has hiked interest rates three times this year, most recently in May, with the official cash rate now sitting at 4.35%.
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Weak economic data make an interest rate cut more likely
NAB Chief Economist Dr Sally Auld said the pendulum had now swung from a tightening bias, with recent data suggesting the economy had lost momentum.
Dr Auld explained:
The next move in the cash rate is likely to be down, but the timing is uncertain. In February, growth was above trend, the economy was operating above capacity and there was uncertainty over the restrictiveness of rates. None of these conditions exist today. Both Q1 GDP data and the NAB business survey suggest momentum in the economy has slowed, meaning that growth has likely peaked for the cycle. That said, we are cognisant there is still considerable uncertainty around the outlook, both with respect to activity and inflation.
NAB's RBA Watch report, released this week, said the bank's economics team was still expecting inflation to remain higher than the RBA's target range through to mid 2027.
The report said:
This outlook is not dissimilar to that of the RBA, as outlined in last month's Statement on Monetary Policy and is likely to keep the RBA watchful around pass through from higher input costs to final prices. We have been worried about a broad and rapid dissemination of inflationary pressures, but the recent slowing in momentum in the economy may short-circuit this dynamic somewhat. If so, margins will compress and weaker labour market outcomes are a risk.
On the employment front, the report said the labour market was close to being balanced, "but the unemployment rate continues to gradually trend higher and we see the unemployment rate as more likely to rise than fall in coming quarters''.
House prices to fall
Dr Auld said the economic slowdown was likely to weigh on housing and activity.
She added:
Tighter financial conditions will be reflected in a slowing in house price growth and housing credit growth.
NAB is forecasting that capital city house prices will on average fall by 2% over 2026.
The report said that the first quarter national accounts shows that the economy had lost some momentum, "as underlying household spending growth is now annualising closer to 1.5%, business investment is weak outside of data centres and dwelling investment continues to grow but not as strongly as demand would imply''.
