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Major banks NAB and Westpac have changed their rate cut forecasts to the May monetary policy meeting in 2025 after previously predicting a rate cut in February 2025.
NAB cited the labour market being stronger than expected as the main reason for this change after.
The unemployment rate has stayed broadly the same since April 2024 (at 4.1 per cent as of October) while other labour market indicators continue to “point to a tight labour market and wage growth remains above the level consistent with the RBA’s inflation target”, according to NAB.
“Once the RBA starts reducing rates, we expect it will do so only slowly, with the cash rate not expected to move back to neutral (3.10 per cent) until mid-2026,” NAB’s economics team said.
“Even with an unemployment rate of 4.5 per cent, the labour market would be close to full-employment, and with around trend GDP growth, and inflation only expected to reach the mid-point of the RBA’s target band by mid-2026, there will be no pressure on the RBA to move rates down quickly.”
However, Westpac’s chief economist Luci Ellis believes that the rate-cutting cycle will be “more front-loaded than previously assumed”, with the following rate cut coming the month after before finishing the reduction cycle at 3.35 per cent by the end of next year.
“As always, our view on the cash rate is predicated on things turning out broadly as we expect, which can differ from the RBA’s own view,” Ellis said.
“An earlier start in February or March is still possible, but it is no longer more likely than a May start date. A later start date is also a risk scenario, if inflation does not decline as the RBA is currently forecasting, let alone our own marginally more dovish expectation.
“That said, the longer the RBA Board waits, the faster they will need to move thereafter, as it would then be more likely that they have hesitated too long.”
At the time of writing, both ANZ and the Commonwealth Bank of Australia’s (CBA) economics teams are still predicting a February rate cut; however, both teams have cited risks to a later start depending on emerging economic data.
The shifts in rate calls came as the November monetary policy minutes said that the RBA is at least open to cash rate movements, albeit in both directions, depending on the evolving economic climate.
The official cash rate has now remained at 4.35 per cent for over a year, with the last rate hike occurring during the November monetary policy meeting in 2023.
[RELATED: RBA ‘ready to adjust’ rates as economic outlook evolves]
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