NAB chief economist Sally Auld has predicted heavy interest rate cuts this year, beginning with a 0.50% cut at the 20 May meeting.
“We expect the RBA to cut by 50bps in May, followed by 25bps in July, August, November and February”, Auld wrote in her May update.
“With the current setting of monetary policy restrictive in both a nominal and real context (see chart) and recent developments shifting the distribution of risks around domestic growth and the labour market to the downside, we think the RBA will see a need to take policy to a more neutral stance relatively quickly”.
“If the RBA knew on 1 April what it knows today, it is likely that the Board would have decided to lower the cash rate by 25bp at the last meeting and followed up that easing up with a 25bp rate cut in May. There is thus some catch up required to align policy settings with recent developments”, Auld wrote.
Auld’s forecast would take the official cash rate down to 3.10% by mid-August from its current 4.10%. The cash rate would then hit 2.85% by year’s end before reaching 2.60% in February 2026.
“As the chart below illustrates, this easing cycle as per our forecasts would look very similar to those which responded to the GFC, and the COVID-19 pandemic”, Auld wrote.
In coming to its forecast, Auld noted that NAB has cut its “2025 GDP forecast by 25bp to 2% and lifted the forecast peak in the unemployment rate from 4.2% to 4.4%”.
NAB also sees “ongoing disinflation in the market services portion of the CPI basket”, which “should ease any lingering concerns the RBA has about the inflationary impact of current labour market dynamics”.
However, Auld admits that NAB’s rate cut forecasts would require “the RBA to shift its thinking on a couple of fronts”, including that the risks to inflation are now skewed to the downside and a less cautious approach in responding to developments.
Financial markets are currently less dovish than NAB, as they forecast an end-of-year cash rate of 3.10%, which implies four 0.25% rate cuts (see the chart below).
I do not agree with NAB’s forecast of a 0.50% rate cut this month. The data simply does not support it.
Three or four 0.25% rate cuts this year looks like the more likely outcome. However, external events will play a significant role in the outcome.
