NAB scraps its two 2019 rate hike prediction - nothing until late 2020
The NAB has scrapped its forecast for two late 2019 rate cuts.
It now predicts no change until late 2020.
"We have delayed our expectation for the first RBA increase in the cash rate to the second half of 2020," ALAN OSTER, its chief economist said today.
"While output growth has been largely as expected over the 2018, wages pressure remains weak and hence inflationary pressure has remained low, with the core measures continuing to track below the RBA’s target band.
"We expect that will continue through all of 2019.
"Our forecasts see a moderation in growth back to potential of around 2.3 to 2.5% and unemployment falling a little further to 4.75% and then remaining at that level.
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"Falling house prices suggest a bigger impact on housing construction than previously incorporated and additional concerns about the consumer, though low rates and unemployment are important offsets.
"The past year, despite growth being stronger than expected, the RBA has overall proven more relaxed about current policy settings than we expected – largely as wage growth failed to lift significantly on the stronger growth outcomes - and we don’t see that changing any time soon.
"The Bank will be looking very carefully at the extent of the slowing in house prices – and in particular that the adjustment remains orderly.
"We can see the case for a forward-looking central bank beginning to very moderately start increasingly rates from the second half of 2020.
"As always the exact timing will be data dependent – with a lift in both wages growth and the inflation forecast particularly important in this regard."
It noted that markets have become very concerned and are now toying with the possibility of the risk of an interest rate cut in the next 6-9 months.
"While that is a possibility we would not rate it as more than a 30% probability.
"Indeed the rate cut view underplays the strength currently evident and likely to remain elsewhere in the economy."
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“While falling house prices have garnered much media attention of late, businesses do not yet suggest they are having a material impact," Oster said.
"Falling house prices in themselves may have a ‘wealth effect’ on households but given the prior large run up the impact of the declines to date is unclear.
"Also lower turnover of house sales and less housing construction activity is likely to have additional negative impacts on both the consumer and house building” Mr Oster said.
Based on recent momentum NAB now expect house prices to fall further than previously forecast over the next two years.
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But its expects the decline to be orderly, with prices still remaining well up on 4 years ago.
"We now expect peak-to-trough declines of around 15% in both Sydney and Melbourne.
"We expect more moderate outcomes in the other capitals.
"The decline in house prices to date represents a significant correction compared with recent housing cycles.
"It is unusual for prices to decline while the unemployment rate is falling and interest rates are low and relatively stable.
"We believe that these declines have been driven by a number of factors including tighter credit, investor price expectations (which also see lower demand for credit) and weaker foreign demand.
"It is also likely that with house prices having significantly outpaced the growth in household incomes overs recent years, there is some adjustment occurring to restore this balance," Oster said.