August rate cut ‘a sure thing’, big bank says

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NAB economists claim the major lender’s prediction of an August cash rate cut is now ‘a sure thing’, and that an additional cut could be on the cards as well, following comments made by RBA governor Glenn Stevens.

“Until yesterday, the RBA had been expressing optimism about other drivers of growth picking up,” the bank said in a release issued yesterday afternoon.

“Yesterday Glenn Stevens provided a much more sober and realistic outlook, suggesting that the economy cannot rely on housing and consumption to plug the growth hole. This is in line with our forecasts and suggests that having recognised the reality of lower growth with benign inflation more rate cuts are likely.”

NAB had already been forecasting a rate cut announcement following the RBA’s August 6 meeting and said that, with the governor giving the ‘green light’ for lower rates, ‘this now looks like a sure thing’.

“We now also expect an additional 25bps cut to 2.25% before year end… although it could be earlier. Beyond this, we expect the Australian economy will continue to grow below trend, income growth to be weak, and the unemployment rate to rise to and possibly above 6.25%. So the RBA will retain a bias to ease well into 2014 and a cash rate below 2 .25% remains a real possibility.”

Since early 2013, NAB has been concerned that the rotation of growth away from mining investment to other drivers of activity might not go smoothly.

“At the start of the year, we initially expected three more rate cuts ahead (so far we have had one in May). However, we changed our forecast to two cuts after a series of optimistic pronouncements from the RBA.

“The RBA’s optimism seems to have evaporated over the past month, if the speech yesterday by Governor Glenn Stevens [is] any guide. It seems that the RBA has changed its way of thinking on the economic outlook.”

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