NAB says Reserve Bank will keep rates on hold well into next decade

Another of the nation's biggest banks has changed its forecast on the direction of interest rates with the NAB saying the Reserve Bank is likely to leave them on hold for an extended period because of growing softness in the economy.

In the wake of its latest monthly business survey, which showed a slump in confidence across the east coast and a worrying deterioration in capacity utilisation by the nation's businesses, the NAB believes there is a chance the RBA may be forced into cutting interest rates within months.

The NAB had believed the next move in rates would be up, probably in the second half of next year.

But the bank's chief economist, Alan Oster, said with inflation remaining weak and households facing a range of headwinds including modest wages growth, the RBA may have to slice the official cash rate from 1.5 per cent.

NAB chief economist Alan Oster says there is now a chance the Reserve Bank will have to cut rates, maybe as early as the second half of 2019.Credit:Jessica Shapiro

"While our central case is for the cash rate to remain on hold, based on the balance of risks the next move could well be down, potentially as soon as the second half 2019," he said.

"With inflation remaining weak and growth weaker than the RBA expected, the risk is that the bank will act to bolster the economy should the labour market show any signs of deterioration or consumer spending weaken further."

While money markets have priced in a rate cut by the start of next year, bank economists have been wary about predicting a move by the RBA which has held rates steady since mid-2016.

The Commonwealth recently changed its rate call, forecasting they will be steady until the middle of next year. Westpac does not believe there will be any change this year or next while the ANZ still has pencilled in two rate rises in 2020.

Mr Oster said it had been expected that a tighter jobs market would lead to a lift in wages that in turn would increase inflationary pressures.

"This process was expected to be gradual, and the RBA was seen to be more patient than previously expected – even with conditions in the labour market quite healthy and likely to be supported by ongoing above trend growth," he said.

"The risks around this outlook have shifted to the downside."

Mr Oster cited the upcoming December quarter national accounts, due in the first week of March, which are now tipped to be as weak as the poor September quarter result of 0.3 per cent.

The retail sector, which the NAB survey showed to be struggling, was likely to have also slowed further.

"Global risks have also risen, with slower growth expected in advanced economies, while uncertainty over the US-China trade war has continued," he said.

Mr Oster said the NAB believes house prices will continue to edge down in Sydney and Melbourne in "an orderly fashion" which may affect consumer attitudes toward spending.

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