NAB Revises Interest Rate
National Australia Bank (NAB) has adjusted its interest rate forecast, now projecting the official cash rate to reach 4.6% by August. The revised expectations come as NAB economists reassess growth and inflation prospects. They anticipate a series of 0.25% rate hikes in July and August. With the Reserve Bank of Australia (RBA) due to meet in July, market attention is focused on the central bank’s response following its recent decision to raise interest rates for the 12th time. While the economy shows signs of slowing, inflation and wage data indicate persistent price pressures, prompting concerns about entrenched wage and price expectations.
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GDP Growth and Inflation
NAB’s Monthly Business Survey for May indicates a slowdown in the economy, reflected in stalling consumer spending. However, inflation and wage data still suggest elevated price pressures. The first-quarter national accounts revealed modest quarterly GDP growth of 0.2%, with rates and inflation impacting consumer sentiment while dwelling investment continued to decline. Although inflationary pressure has peaked, the domestic final demand and consumption deflators remain high. NAB highlights the significance of domestic labor costs in determining inflation trends. While global goods inflation pressures are subsiding, uncertainties remain regarding how quickly businesses will transmit price reductions to consumers.
Labor Market and Inflation
NAB predicts that domestic labor cost pressures will play a crucial role in moderating inflation. Despite the wage price index (WPI) reporting a year-on-year wage growth of 3.7%—comparatively lower than other advanced economies—recent wage increases for individuals in the private sector have exceeded 4%. This suggests a potential strengthening of the overall WPI in the coming quarters, especially with the recent national minimum wage hike impacting a substantial portion of the workforce. Given weak cyclical productivity growth, a swift return of inflation to the middle of the RBA’s 2% to 3% target range is unlikely without a boost in productivity.
Growth Outlook and Monetary Policy
NAB has revised its growth expectations downward for this year and the next, projecting GDP growth of 0.5% in 2023 and 0.9% in 2024. The bank attributes the adjustment to signs of interest rate effects gradually materializing, resulting in slower spending growth and ongoing impacts on housing construction and capital expenditure expectations. Moreover, there is still a considerable portion of previous interest rate hikes yet to be passed on to mortgage holders.
NAB’s economists also foresee a gradual increase in unemployment, estimating a rate of 4.3% by the end of the year and 5% by the close of 2024. Considering the anticipated economic slowdown, NAB suggests that the RBA will need to adopt forward-looking metrics for policy decisions. They expect slower growth to have a significant impact on the labor market by mid-2024, leading to eased inflation pressures. NAB envisions a return to a more neutral cash rate of around 3%, with rate cuts likely commencing in Q2 2024.
NAB’s revised interest rate forecast reflects expectations of further rate hikes in the coming months. Despite signs of economic slowdown, persistent inflation pressures and wage data suggest challenges in managing price expectations. NAB also anticipates a slower growth trajectory and rising unemployment, prompting the need for the RBA to adopt forward-looking measures in setting policy. As economic conditions evolve, the timing and magnitude of rate adjustments will be critical for maintaining stability and managing inflationary risks in the Australian economy.