NAB expects long freeze on rates

By Stephen McMahon
From: Herald Sun
September 16, 2011 12:00AM

Economists at NAB believe the Reserve Bank for another 14 months / File

INTEREST rates are likely to stay on hold until Melbourne Cup Day next year, in what would be Australia's longest rate freeze in more than two decades, according to National Australia Bank.

Economists at NAB believe the Reserve Bank, content that inflationary pressures are now under control, will stay on the sidelines for another 14 months.
The freeze in the official cash rate, which has already been on hold for 10 months, would provide a crucial shot in the arm for flagging consumer confidence and retail sales. NAB, which had previously forecast a rate rise next May, is still tipping an increase of 25 basis points when the central bank finally acts.
The cash rate has been on hold at 4.75 per cent since Melbourne Cup Day last year.
The bank updated its forecasts after the Australian Bureau of Statistics changed the way it calculates the consumer price index -- the key measure of inflation.

NAB said it now expected core inflation to remain between 2.5 per cent and 2.75 per cent -- within the RBA's target range of 2 per cent to 3 per cent -- until 2013.
The ABS this week revised its reading for June quarter inflation to 0.6 per cent -- from 0.9 per cent -- putting annual inflation comfortably within the target range.
NAB chief economist Alan Oster yesterday acknowledged it was unclear how the RBA would respond to the revision, but envisaged the central bank would now sit tight on interest rates.
"While there remain some downside risks to the near-term inflation outlook, reflecting both global and domestic factors, we still anticipate that inflation will rise above the target band in mid-2013 as the labour market tightens and underlying growth in the economy strengthens," Mr Oster said.
"NAB anticipates a long period of inaction by the RBA, before increasing rates to 5 per cent in November 2012."
Mr Oster said the only other likely scenario was the RBA cutting rates if unemployment -- now at 5.3 per cent -- jumped above 5.5 per cent as the global economic situation deteriorated.
Futures markets continue to point to a rate cut of 75 basis points by Christmas, while Westpac is the only major bank tipping the next move for interest rates will be down.
Westpac chief economist Bill Evans has forecast a cut of 25 basis points in December as the RBA moves to bolster flagging consumer sentiment while the European banking crisis accelerates.

Monday, 19 September 2011