NAB predicts Reserve Bank will keep rates on hold for May

NAB has altered its rate cut forecast for May, now predicting that the Reserve Bank will keep the official cash rate unchanged at 2.25%.

The bank now believes the Reserve Bank will wait until August to cut the interest rate to 2.0%. NAB attributes its changed prediction to yesterday's quarter one Consumer Price Index (CPI) data, which showed underlying inflation remained within the Reserve Bank's 2-3% inflation target.

NAB has adjusted its domestic demand forecast slightly after observing improvements in retail sales, home investment and business conditions. However, the bank also noted that despite the recent increase in iron ore prices, commodity prices have decreased for the quarter, further slowing gross domestic product (GDP) and the mining sector.

"In our forecast these forces have basically offset and leave GDP growing close to, but a little below, the trend growth rate of 3% in the year ahead," NAB's forecast update reads.

"In better news, the lower starting point for the unemployment rate, and recent better pace of jobs growth, has led us to revise down the expected peak in the unemployment rate from 6.7% to 6.4%. We still expect this peak to occur around Q4 2015."

While NAB still believes the current low inflation rate and expected increases in the unemployment rate will lead to a rate cut in the future, the "urgency to cut" has reduced by the economy's recent performance.

"In a speech earlier this week, the RBA Governor implied that the cash rate already being at a super low level, household leverage being at an all-time high, and rising asset/house prices are all reasons to be cautious about reducing interest rates further," states the report.

"Latest data on house prices suggest they continue to rise strongly in Sydney and more recently this has broadened to other cities."

Despite their expectation of a 25 basis point cut in August, NAB states that "it's also possible that we continue to be pleasantly surprised by the economy which would allow the RBA to hold the cash rate at 2.25%".