We have included an additional 25bp cut to the cash rate in our rate track. We now expect cuts in both February and June 2020 – taking the cash rate to 0.25%. At this point, we see an increased risk of a move to ‘unconventional’ policy in H2 2020 should the labour market deteriorate more significantly than we forecast, with low inflation posing little constraint to further easing. Previously, we had pencilled in only a further 25bp cut to the cash rate and hoped to see a material support from fiscal policy, which now looks unlikely in the required timeframe. Our forecasts of below-trend growth, a deterioration in the unemployment rate and inflation firmly below the RBA’s target band are broadly unchanged, but clearly imply the need for policy makers to do more. Weak private-sector growth is likely to see employment growth slow and unemployment drift further above the NAIRU, cementing weak wages growth. Indeed, our forecasts for the household sector and business investment are notably weaker than the RBA’s, although we remain more optimistic on public spending. Should the data turn out weaker than our forecasts, there is a real prospect the RBA moves to unconventional policy in H2 2020.

For further details, please see the NAB changes rate call – December 2019