NAB joins Lloyds TSB in forecasting higher RBA cash rate next year if economy remains strong

NAB has changed its outlook on interest rates and is now the second lender forecasting interest rates to rise by mid-2013.

The revised forecast is based on the assumption that there is no further deteriorating in economic conditions and that there is a general pick-up in the economy, according to NAB head of Australian economics and commodities Rob Brooker.

The only other lender expecting a higher cash rate by mid-next year is Lloyds TSB, which expects the cash rate to remain unchanged at 3.5% until the first quarter of 2013 and then rise to 3.75%.

In the most recent Bloomberg poll of economists on August 3 – ahead of the August 7 rate decision – NAB forecast the cash rate to fall to 3.25% in September and to remain at that level until the third quarter of 2013, when the bank expected it to rise to 3.5% and finish the year at 3.75%.

Based on the sentiments of 27 economists, Bloomberg has median cash rate of 3.25% – 25 basis points lower than the current setting – as of mid-2013.

NAB’s monthly business survey shows that business confidence surged higher in July, after deteriorating steadily over the previous two months, but business conditions weakened.

The survey shows a sharp increase in both labour and purchase costs.

Taking note of the NAB survey, ANZ said it showed that business conditions remained below their long-term average, but “they do not significantly increase the likelihood of a near-term rate cut by the RBA”.

“Indeed, recent communications from the RBA suggest the bank is comfortable with current policy settings for the time being.

“Nonetheless, ongoing global economic uncertainty, soft domestic activity outside of the mining sector and a benign inflationary environment, will most likely provide scope for further modest policy easing by the RBA,” said ANZ