A big four bank has confirmed it is preparing for two rate cuts before the end of 2019.
Speaking at the NAB Budget Breakfast yesterday, NAB chief economist for markets, Ivan Colhoun, noted that the RBA has likely been stumped by the combination of the decreasing unemployment rate and slackening of GDP growth.
“The lower unemployment would say do nothing, but the slower GDP growth would say cut rates,” Colhoun explained.
That said, he pointed out the significant change in the final paragraph of the reserve bank’s announcement earlier this week which said the RBA is now “monitoring” monetary policies, a notable shift from the last several years.
According to Calhoun, “[NAB] thinks they will cut interest rates twice in the second half of this year.”
Jonathan Pain, independent economist and author with decades of international finance experience, also weighed in on the matter.
“I agree with NAB that the RBA is going to cut rates. I think they’re going to be very aggressive this time around,” he said.
“If we didn’t have this election in May, I think the RBA would already have been cutting rates. The final sentence of the reserve bank statement opened the door for a rate cut at their next meeting, in my view.”
However, there was a key difference in the predictions of the two financial leaders.
Pain said, “NAB is going for two rate cuts, from 1.5% to 1%. I’m going for four rate cuts by the end of this cycle.” The economist sees the rate settling at 0.5% in two years’ time.
The divergence stems from the two leaders’ views on what banks would do with a cut in rates.
After clarifying that he’s not personally involved in making the decision, Colhoun stated that he “expects rate cuts to be passed on” to NAB customers as long as “funding pressures stay lower.”
Pain disagreed stating, “Banks always want to protect their margins.”
“One of the reasons I’m going for a 1% cut in rates in the next two years is because I don’t think the banks will fully pass it on. I think they’ll pass on about 60-65%.
“Does it matter? Absolutely. The majority of mortgages in Australia are of a variable rate nature, so the cash rate that the reserve bank sets is very important for us from a business perspective and from a mortgage prospective,” he concluded.