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To hold or to hike? NAB makes bombshell rate call
One of the country’s biggest banks has revised its official cash rate forecast as economic pressures accelerate.
National Australia Bank (NAB) now expects the cash rate to have already peaked at 4.35 per cent, adding that it believes the next move will likely be a cut.
NAB’s economists on Tuesday (9 June) abandoned their expectation of a further 25‑basis‑point increase in August, recasting 4.35 per cent as the height of the tightening cycle and sketching out a gentler track moving forward.
“We no longer expect the Reserve Bank of Australia to hike by 25basis points in August, and now see the cash rate peaking at the current rate of 4.35 per cent for the cycle,” NAB said.
“The next move in the cash rate is likely to be down, but the timing is uncertain. To highlight shifting risks to the RBA outlook, we have brought forward our expected easing from H2 2027 to Q2 2027 – which now sees the cash rate end 2027 at 3.6 per cent.”
Yet NAB stressed that it had more conviction about the general direction of rates than the exact timetable.
“While we are confident that the RBA is now on hold and that the next move in rates is down, we are less certain on the timing. Indeed, there are reasonably large uncertainties on both the activity and prices outlook at present,” NAB outlined.
“We may have misread the consumer with ongoing seasonality issues clouding the assessment. Consumption outcomes may be better than we anticipate in coming quarters.”
Labour‑market signals were another reason the bank was reluctant to put a firm date on the first cut.
“Forward indicators of labour demand look reasonable thus far, and haven’t yet weakened in line with softer momentum in the domestic economy,” it highlighted.
In regard to inflation, NAB warned that, on the one hand, price pressures could linger, stating “inflation passthrough may come later, but is still broad-based” while also sketching a scenario where businesses absorbed more of the adjustment.
The bank also explained why it expected borrowers to live with tight settings for a considerable amount of time.
“For now, we believe the economy will likely still require a period of restrictive rates while there is uncertainty around the extent to which inflation is moderating towards a quarterly run rate consistent with the 2–3 per cent inflation target. This suggests a period of policy stability is likely in the near term,” NAB said.
The Commonwealth Bank of Australia (CBA) and Australia New Zealand Banking Group (ANZ) are already assuming no further hikes this year, while Westpac is still pencilling in 25‑basis‑point hikes in August and September.
Tax changes seen as ‘extra tightening’ for housing
Beyond rates, NAB devoted a substantial part of its update to the federal government’s proposed changes to investor tax settings.
“We are minded viewing the proposed changes to taxation arrangements for housing and other asset classes as an exogenous tightening of financial conditions,” NAB said.
The bank went on to say that the impact would be visible in both prices and borrowing, stating, “tighter financial conditions will be reflected in both a slowing in house price growth and housing credit growth”.
NAB also noted that lenders were already repositioning ahead of the tax changes by cutting back how much they were prepared to advance to investors.
“In housing, lenders have already reduced maximum loan values for investors, in the order of ~20 per cent, in response to the proposed changes in taxation arrangements for investment properties. Given that 40¢ in every $1 of mortgage lending flows to investors, this is a sizable decline in borrowing capacity in aggregate,” it said.
Credit forecasts swing lower
Reflecting that more cautious read on the policy mix, NAB has significantly trimmed its expectations for credit conditions over the next couple of years.
It said it expected overall housing credit growth to slow markedly and that investor lending would slip into negative territory.
“For housing credit growth, we forecast a reasonably sharp deceleration in the headline measure and expect a decline towards 2.7 per cent yoy by the end of 2027,” NAB said.
“In the main part, this will be driven by a significant decline in the growth of investor mortgage lending. We expect the annual growth rate in this series to decelerate towards -1.4 per cent by the end of 2027.”
Looking at the change in credit growth rather than the level, NAB warned that the downshift could be as pronounced as some previous slowdowns, including the global financial crisis.
“Looking at the ‘credit impulse’ we observe that our forecasts envisage a sharp retracement in the coming year. The magnitude of this retracement looks broadly similar to the credit cycles experienced in the early 2000s, but worse than the cycle experienced in the GFC,” it outlined.
This article is from SPI’s sister publication The Adviser.
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