2025 rate cuts likely to be ‘gradual’, says NAB
NAB expects the Reserve Bank will make one cut per quarter to interest rates next year, with the first cut to occur in February.
NAB has announced it expects the Reserve Bank (RBA) to provide interest rate cuts on a steady profile of one cut per quarter back to 3.10 per cent by early 2026.
The bank said it expects the first RBA cut to come in February 2025, having previously been May 2025.
“Domestic inflation pressures are cooling, but only gradually, and we continue to expect the conditions for a cut will not be in place this year,” NAB said.
“The risk has been skewed to a first cut earlier in 2025, and today’s change acknowledges the balance of risks has likely shifted sufficiently for the RBA to feel comfortable cutting a little sooner than we earlier expected.”
NAB also noted the RBA cuts are expected to be “shallower” than many peer central banks.
In the monetary policy update, it was revealed the bank sees H1 2024 to have marked the trough in growth, however, expect a more modest pickup than the RBA’s own forecasts.
This includes the expectation for the unemployment rate to experience another slight uptick before stabilising around 4.5.
Over 2025, NAB revealed it expects an underlying CPI of 2.6 per cent.
“Elevated inflation is being sustained by housing and stubborn pressures across domestic labour and non-labour costs,” the bank said.
“We expect cost drivers to fade as capacity constraints ease further, and soft demand growth to inhibit passthrough to end consumer prices.”
It was also noted the worst of the real income squeeze is “behind us” as inflation has moderated and tax cuts flow through.
The RBA will hold for longer if this supports a more material pickup in activity that slows or stalls progress on disinflation, according to NAB.
“Conversely, confirmation of further progress on inflation would give the RBA space to respond more aggressively if the labour market showed signs of deteriorating.”
For 2025, NAB has predicted steady cuts through the year which will see the cash rate sit at 4.1 per cent in Q1, 3.85 per cent in Q2, 3.6 per cent in Q3 and 3.35 per cent in Q4, before hitting 3.1 per cent in Q1 2026.
NAB said growth in Australia is slow, weighed down by private growth and a discretionary-consumption-led pullback by households squeezed by cost-of-living pressures.
“Further easing is expected as growth remains below trend in the near term and we expect by February the RBA will have seen enough to conclude that excess demand is receding as an inflation driver and policy can begin to adjust away from modestly restrictive settings.”
“NAB forecasts that trimmed mean inflation will slow from 3.5 per cent over 2024 to 2.6 per cent over 2025.”
According to NAB, the RBA’s tightening phase has been more gradualist than other economic peers as it has less space to adjust the level of restriction while continuing to weigh down on activity.
About the author
