NAB Change to Rate Call – December 2018

• We have delayed our expectation for the first RBA increase in the cash rate to the second half of 2020.
• While output growth has been largely as expected over the 2018, wages pressure remains weak and hence inflationary pressure has remained low, with the core measures continuing to track below the RBA’s target band. We expect that will continue through all of 2019.
• Our forecasts see a moderation in growth back to potential of around 2.3 to 2.5% and unemployment falling a little further to 4.75% and then remaining at that level. Falling house prices suggest a bigger impact on housing construction than previously incorporated and additional concerns about the consumer, though low rates and unemployment are important offsets.
• The past year, despite growth being stronger than expected, the RBA has overall proven more relaxed about current policy settings than we expected – largely as wage growth failed to lift significantly on the stronger growth outcomes – and we don’t see that changing any time soon.
• The Bank will be looking very carefully at the extent of the slowing in house prices – and in particular that the adjustment remains orderly. That is still our expectation – see our Forward View released today – an expectation supported by the response to a special question on house prices in this month’s NAB Survey, which revealed very few businesses had seen any significant impact from lower Melbourne and Sydney house prices.
• In brief we still see the economy moving in the right direction, with growth although slowing, remaining solid, the labour market tightening into mid-2019 with wages to lift moderately. The upcoming Budget is also likely to be consumer friendly.
• In those circumstances, we can see the case for a forward-looking central bank beginning to very moderately start increasingly rates from the second half of 2020. As always the exact timing will be data dependent – with a lift in both wages growth and the inflation forecast particularly important in this regard.

For more information, please see the attached document:

NAB Changes Rate Call: December 2018