National Australia Bank (NAB) has revised its forecast for the Reserve Bank of Australia’s (RBA) NAB has changed its prediction about when the Reserve Bank of Australia (RBA) will cut interest rates. They now believe the first rate cut will happen in May 2025, instead of February 2025 as they had thought earlier.
This update is due to unexpected strong job market data, indicating that the Australian economy is more resilient than initially believed. NAB’s economists think the RBA will wait to cut rates until there is clearer evidence that inflation is consistently at its target range of 2-3%.
Reasons Behind NAB’s New Prediction
- Strong Job Market: Recent reports show that Australia’s unemployment rate stayed steady at 4.1% in October 2024, despite expectations for it to rise to 4.3%. Having more people employed can lead to increased spending and wage growth, which can put upward pressure on prices. This solid job market may cause the RBA to hesitate before cutting rates.
- Inflation Worries: While the overall inflation rate has dropped to 2.8%, the underlying inflation rate—excluding volatile prices—remains high at 3.5%. The RBA has repeatedly said it won’t lower rates until inflation is reliably within its target range. With only two more job reports and one inflation reading before the February meeting, NAB doubts the RBA will feel confident in a rate cut by then.
- Global Trends: NAB notes that while other countries are starting to cut rates, Australia’s approach will be more cautious and gradual. The RBA’s current stance is described as “modestly restrictive,” meaning there’s no urgent need to lower rates since both inflation and unemployment are changing slowly.
What This Means for Borrowers
For homeowners and others with loans who were hoping for lower interest rates, NAB’s updated forecast is not encouraging. The cash rate has been at 4.35% for over a year, and with the first cut now expected in May 2025, borrowers may have to deal with higher mortgage payments for longer.
For example, someone with a $600,000 loan could end up paying nearly $2,000 more in interest over two years if the rate cuts are pushed back to May.
Additionally, a recent report highlighted that more households across Australia are struggling to keep up with their home loan payments as interest rates remain high.
Future Rate Cut Outlook
NAB predicts that after the initial cut in May 2025, there will be one rate cut every quarter, bringing the cash rate down to 3.10% by mid-2026.
This outlook differs from other major Australian banks, such as Westpac and Commonwealth Bank, which still expect a February rate cut.
However, NAB is cautious, warning that if the job market remains strong or inflation continues to be a concern, rate cuts might be delayed even further into late 2025.
In simple terms, while NAB believes interest rates will eventually go down, they also stress that there’s no rush for the RBA to make changes given how slowly inflation and unemployment are evolving.