NAB has predicted that interest rates will likely rise above 4 per cent in the coming months as the Reserve Bank (RBA) seeks to return inflation to target within a “reasonable timeframe”.
The big four bank has forecast that the cash rate will likely peak at 4.1 per cent, following an expected pause in June and a 25 basis point (bp) hike in July.
However, NAB refused to rule out the possibility that the cash rate may move even higher, with an increase to 4.35 per cent assessed as a “real possibility”.
NAB chief economist Alan Oster said that the bank’s lack of confidence comes down to numerous “mixed signals” received from the RBA throughout the year.
“However, it is clear that the near-term balance of risks on inflation remain to the upside, and the RBA is forecasting inflation to only return to the top of the target band by mid-2025,” he said
“At least one additional rate rise is likely to be necessary to limit the risk this timeline slips any further. We wouldn’t rule out the prospect of an additional rise to 4.35 per cent if the data stays stronger for longer.”
In its latest statement on monetary policy, released earlier this month, the RBA forecast that the headline consumer price index (CPI) would slow from 7.0 per cent in the March quarter to 4.0 per cent by the end of 2023, and to 3.0 per cent by mid-2025.
Mr Oster assessed that the decision would ultimately be based on whether the RBA board is comfortable with inflation remaining above its target range of 2 to 3 per cent for another two years.
“In our view, inflation above target for a further two years is likely to be the very limit of what the board would consider a ‘reasonable timeframe’,” he said.
“Indeed, given the recent RBA Review recommended the board focus on achieving the mid-point of the target (2.5 per cent), it may be that reaching only 3 per cent by the end of the forecast period is outside what is reasonable.
“On this basis, the cash rate would need to be higher than the current level to ensure inflation moderates sufficiently quickly, especially if there are any unwanted surprises on the wages front.”
According to Mr Oster, a cash rate of 4.1 per cent would clearly be in restrictive territory and would have a material impact on household cash flow.
“However, assessing the restrictiveness of monetary policy in real time is difficult, and it is a real possibility that an even higher cash rate of 4.35 per cent is necessary to balance the risks on inflation,” he said.
“For now, we see a rate peak of 4.1 per cent as most likely, including because of the RBA’s signalled willingness to tolerate a more gradual return to target inflation.”
NAB also noted that its revised rate call had not been issued in response to last week’s federal budget, which the bank deemed to be “broadly neutral in terms of its effects on inflation and implications for monetary policy”.
“With the budget overall taking more out of the economy than it’s putting back in compared to what was projected last October, it’s hard to see significant implications for the RBA but it will be wary of the boost to households from the cost-of-living measures which could boost spending,” he said.
Additionally, Westpac chief economist Bill Evans said that despite $20 billion in spending over the next three years, the budget would not “threaten” the near-term outlook on interest rates.
“The near term is what happens at the August board meeting, so we don’t think that [the RBA will] see a reason to move,” he said.
