NAB forecasts next rate cut in December

NAB have forecast the next RBA cut will come before we tick in to 2020.

In their report The Forward View, NAB Economics are predicting a December rate cut, a fourth cut this calendar year, which will bring the official cash rate down to a historic low 0.5 per cent.

Economists Gerard Burg, John Sharma and Phin Ziebell, co-authors of the report, suggest the NAB continue to expect growth to remain below trend, with just a small improvement expected.

They also expect the labour market to deteriorate slightly with the unemployment rate edging higher, with inflation to also remain weak.

"With these predictions largely a continuation of recent trends, it is likely that we will see a further reduction in interest rates by the RBA," the report notes.

"While the RBA has now lowered rates three times this year, taking the cash rate to a record low of 0.75%, we think that further stimulus will be required to support the economy, given the private sector remains weak and heightened global uncertainty poses significant risk.

"We have pencilled in a further cut in the cash rate of 25bps in December taking rates to a new low of 0.5%."

NAB see potential for a further cut in the first half of 2020 should downside risk materialise and more significant fiscal stimulus fail to eventuate.

"The key dynamics behind our assessment of the economy continue to be headwinds from a weak consumer and a significant downturn in housing construction," NAB advise.

"That is being partly offset by strong public sector spending and growth in exports.

They suggest that the recent tax cuts appear to have failed to provide a significant boost to household spending given retail sales growth remains soft.

"We think the recent rate cuts will have an impact, but the effects will take longer and be more variable, which will make them less apparent.

NAB have positive forecasts for the national housing market.

"Conditions in the established housing market continue to brighten, with house prices continuing their recovery in Sydney and Melbourne.

"It is likely that lower interest rates, low unemployment and still strong population growth, combined with a pull-back in construction, will support prices going forward, there are clearly a number of state specific factors at play."

Despite the turnaround in price conditions, the continuing building approval decline is likely to put some downward pressure on the market.

"The activity side of the market is likely to continue to weaken with building approvals continuing to trend down.

"Overall, we expect the downturn in the housing construction cycle to continue.

"We expect further falls in dwelling investment with approvals continuing to trend lower and the large pipeline of work outstanding to be rapidly depleted.

"The increase in prices to date is a positive, but will need to be sustained, with activity returning to more normal levels in the market before residential construction sees a recovery.

"We continue to expect a modest increase in process over the next year or so."