Finance Finance News NAB predicts mid-2019 rate hike, as weak economic conditions persist

NAB predicts mid-2019 rate hike, as weak economic conditions persist

Will there be a rate hike later than expected? Photo: AAP
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One of Australia’s largest banks is no longer feeling as optimistic about the economy as it was before.

National Australia Bank (NAB) had been predicting that Australia’s official cash rate would rise from its record low (1.5 per cent) by the end of this year.

But it now expects the Reserve Bank (RBA) will not begin its gradual rate-hiking cycle until at least mid-2019, half a year later than its previous forecast.

“The change reflects the fact there is no sign yet of stronger wages growth and unemployment has been stuck around 5.5 per cent for the best part of a year,” NAB’s chief economist Alan Oster said.

Even though NAB has lowered its expectations on the timing of the next rate hike, the bank still expects the economy to “strengthen, leading to a declining unemployment rate”.

“This should eventually translate into stronger wages growth and give the RBA confidence that inflation will track back to its 2.5 per cent target,” Mr Oster said.

“However, we acknowledge there is considerable uncertainty around the timing at which wages growth will strengthen, and the time of the RBA’s next move will remain highly data-dependent.”

Recent signs point to weakness

Unfortunately, the most recent economic figures do not provide a strong case for optimism.

The latest figures show that pay rises for Australian workers are mired near historic lows.

The Wage Price Index (WPI) rose by just 0.5 per cent in the first three months of the year, or 2.1 per cent over the year. It was the second-slowest quarter on record for the WPI.

Wages rose by just 2 per cent in the 12 months to September.
Wages growth is still stagnant. Photo: Getty

It also raises doubts about the federal budget, and whether it will return to surplus in 2019/20 (a year early), albeit a wafer-thin surplus of $2.2 billion.

The budget is premised on the rosy assumption that wage growth will average 2.75 per cent over 2018/19.

Furthermore, last week’s figures reveal that the unemployment rate edged up to 5.6 per cent in April, seasonally adjusted.

It also does not help that headline inflation rose by 1.9 per cent in the first three months of the year, and continued to underperform the RBA’s 2-to-3 per cent target for the 10th consecutive quarter.

What are others predicting?

Compared to other financial institutions, NAB’s initial forecast was a lot more optimistic than the others.

NAB’s revised expectation of a mid-2019 rate hike puts it more in line with the others.

For example, Commonwealth Bank’s senior economist Kristina Clifton believes the RBA will keep rates on hold until February 2019.

“The jobs market is improving but inflation and wages trends are still very tame and non-threatening,” she said.

Global investment bank UBS predicts the next interest rate rise will not happen until the second half of next year.

“The environment in which interest rates would be rising … is highly likely to be one where wages and household incomes are also growing faster than currently,” UBS economist George Tharenou said.

On the bearish end of the spectrum was Westpac, with its economics team anticipating interest rates to remain at 1.5 per cent for the whole of 2019.

AMP’s chief economist Shane Oliver believes the Reserve Bank’s next move could even be a rate cut, due to “slowing jobs growth and still weak wages growth”.

“We don’t see a rate hike until 2020 at the earliest and still can’t rule out a rate cut,” he said.