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Reserve Bank could cut rates in second-half, says NAB

Glenn Freeman with AAP  |  13 Feb 2019Text size  Decrease  Increase  |  
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National Australia Bank economists have conceded the possibility of a cut in official interest rates before the end of 2019, reversing their earlier stance of a rate rise in late 2020.

"We ... now expect the cash rate to remain on hold over the forecast horizon," the bank's economists wrote in a research note released on Tuesday.

"While our central case is for the cash rate to remain on hold, based on the balance of risk, the next move could well be down - potentially as soon as H2 2019."

The Reserve Bank has left the rate at a record low 1.5 per cent, and last week shifted to a neutral stance, from its previous bias toward rate increases.

The NAB economists said signs pointed to weakness in the Australian economy, especially in retail spending as consumers face a cocktail of pressures on their purchasing power.

"In particular, we see ongoing slow wage growth, falling savings rates, high debt levels and falling house prices as ongoing headwinds," NAB said in a note authored by chief economist Alan Oster, global head of research Ivan Colhoun and senior economist Gareth Spence.

Morningstar's head of equity research, Peter Warnes, echoes these views.

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"For the last six months, we've been saying that the RBA has been too bullish on expectations for GDP growth and its outlook for employment has been too high," he says.

"And in addition to that, housing price falls have been much greater than they had thought, so household income, more importantly disposable income, is continuing to be under pressure, with no relief on the expense side, and that means household consumption is under pressure."

Warnes says the admission last week by RBA governor Philip Lowe, that the likelihood of a rise or a cut in official interest rates is “more evenly balanced” than a month ago, was no great surprise.

He also highlights Lowe's warnings on the global front, of an “accumulation of downside risks” from US-China trade tensions, rising populism and Brexit.

"Closer to home, the potential of a contagion rippling through the economy from the sharper than expected fall in housing prices has clearly hit home," Warnes says.


Falling property prices and lower household income are behind RBA's revised rates view

Political uncertainty

Warnes believes uncertainty ahead of the Australian federal election in May also underpins softer consumer sentiment and in turn, weaker retail spending and house prices.

"There's a lot of noise out there about the election, and when elections are on, consumers usually go into their shell – they don't spend money, and people are unlikely to be buying houses," he says.

In terms of interest rate moves, Warnes believes much will depend on what happens to housing prices between now and July.

"I expect that after the election in May, we'll have a better feel for things. Once we get through that, people can start to do some planning … but at this point in time, people can't make any decisions."

NAB's team joins an increasing number of economists flagging a potential rate cut this year, with many having suggested the move long before the RBA downgraded its economic forecasts.

UBS economist George Tharenou said last week that "the next-move-is-up scenarios" were more likely than the "next-move-is-down scenarios" over the last year – but the probabilities now appear to be more evenly balanced.

"On the growth outlook, Lowe put more weight on the global backdrop and downside risks. Hence, Lowe's speech was much more dovish than the RBA's February Board meeting [just a day earlier]," Tharenou said.

The NAB trio predicted wage growth to increase gradually but expected only modest decreases in unemployment, and forecast house prices to keep declining in Melbourne and Sydney, "but to do so in an orderly fashion".

Meanwhile, NAB's monthly survey of 400 firms, released on Tuesday, found that business confidence remained below average despite edging up in January after falling sharply in December.

NAB said its business survey found that confidence was weakest in Victoria and NSW, and higher in SA and WA.

"While we don't think activity in the business sector has crashed, we think that there has been some loss in momentum," Oster said, especially among retail businesses.

"Car sales and household goods continue to show the weakest and falling conditions in our survey - this is consistent with the broader macro story at present."

. Glenn Freeman is senior editor, Morningstar Australia.

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