NAB changes interest rate forecasts for 2013

Economists at the NAB have changed their interest rate outlook and now expect the official cash rate to fall to 2.25 per cent this year.

With the economy continuing to weaken and unemployment set to rise noticeably through 2013 they are tipping the RBA will need to shave a further 75 basis points off the current cash rate of 3 per cent in response to deteriorating domestic economic conditions.

NAB’s chief economist Alan Oster says his economic growth forecast has been downgraded from 2.5 to 2 per cent for this year, because conditions are not improving.

“We’re not saying the economy’s going backwards, but it’s hit a very soft patch, and if it sort of improves a bit from mid-year then you’ll get something like 2 per cent growth,” he predicted in a report issued yesterday.

“Now, in that sort of environment, unemployment goes up to something like 5.5-5.75 per cent and, essentially, the Reserve will feel uncomfortable about doing nothing.”

3 rate cuts this year.

NAB is tipping three separate 25-basis-point rate cuts this year.

“You could well have one in February, if not I think by March anyway,” said Ostler.

“Then I think the Reserve would like to sit and watch for a while but we think, by the middle of the year, they’ll see the need to do more, so we’ve tentatively put the rate cuts in March, May and August.”

Other forecasts by the NAB

• NAB have  reviewed their GDP forecasts and currently see 2013 at around 2% (2½% previously) with unemployment rising to around 5¾% by late  2013. That would see, on a no policy change basis, a budget deficit in the $10-15bn range for 2012/13.
• NAB  still expect GDP growth of 2.8% for 2013/14 and a touch above 3% in 2014 helped by new rate cuts.  However that implies a larger output gap and unemployment remaining elevated (around 5 ¾ – 6%) with the Government fiscal position near balance.
• The weaker activity outlook will also help contain inflation to below 3% even including the carbon tax impact.  Nor do they see the AUD offering much relief to a struggling economy.
• They have put the first interest rate cut in Q1 – where the Q4 CPI outcome in late  January will be important as to exact timing. Thereafter we expect the RBA to wait to see the impact of recent policy moves but will need to react further by mid year. They have tentatively put further cuts in May and August.
• NAB now expect a terminal cash rate of 2¼% in the September quarter of this year
• NAB  continue to expect the Australian dollar to track gradually lower during 2013, as the combination of continuing RBA rate cuts and a firmer US dollar weigh on the currency.  Nonetheless our forecast of around parity in late 2013 still represents a strong currency.