National Australia Bank (NAB) has updated its interest rate forecast.
On Tuesday, the major bank reversed course, saying it now expects the Reserve Bank of Australia's (RBA) next monetary policy decision to be a rate cut, citing a softer economic backdrop and changing conditions since earlier this year.
“The next move in the cash rate is likely to be down, but the timing is uncertain," said NAB Chief Economist Sally Auld. "In February, growth was above trend, the economy was operating above capacity and there was uncertainty over the restrictiveness of rates. None of these conditions exist today.”
Previously, NAB had forecast the RBA would leave rates unchanged in June before delivering a 25-basis-point hike in August. The bank has revised that view, expecting the cash rate to fall to 3.6% by the end of 2027.
"While we are confident that the RBA is now on hold and that the next move in rates is down, we are less certain on the timing," Auld said. "Indeed, there are reasonably large uncertainties on both the activity and prices outlook at present.
"We may have misread the consumer with ongoing seasonality issues clouding the assessment," the economist continued. "Consumption outcomes may be better than we anticipate in coming quarters.”
The RBA has raised the official cash rate (OCR) three times in 2026, lifting the rate to 4.35%. Persistent inflation, rising living costs, looming tax changes and heightened uncertainty at home and abroad, including a surge in global oil prices driven by conflict in the Middle East, have fuelled market fears that another rate hike could be on the horizon.
However, slowing GDP growth suggests the economy may be losing momentum, a factor that could weigh heavily on future rate decisions.
“Both Q1 GDP data and the NAB business survey suggest momentum in the economy has slowed, meaning that growth has likely peaked for the cycle," Auld explained. "That said, we are cognisant there is still considerable uncertainty around the outlook, both with respect to activity and inflation.
“For now, we believe the economy will likely still require a period of restrictive rates while there is uncertainty around the extent to which inflation is moderating towards a quarterly run rate consistent with the 2% to 3% inflation target," the economist continued. "This suggests a period of policy stability is likely in the near-term."
The RBA has repeatedly signalled that it will not begin easing monetary policy until inflation is firmly back within its 2% to 3% target range. However, recent inflation readings reveal that underlying price pressures remain elevated.
The latest consumer price index (CPI) shows that inflation is leveling off in Australia, with headline CPI falling to 4.2% in the 12 months leading up to April, down from 4.6% in March. Still, both headline CPI and trimmed mean, which rose to 3.4% in April, are well above the RBA's target band.
“On the price side, we are still forecasting above target core inflation through to mid-2027," Auld said. "Margins will compress and weaker labour market outcomes are a risk. Tighter financial conditions will be reflected in a slowing in house price growth and housing credit growth.”
But not all market players are convinced that a rate cut is in the cards anytime soon.
"I think everyone's sort of expecting a hold because GDP was weaker than expected," Joey Delis, an Adelaide-based broker at Loan Market, told Australian Broker. "Holding would be the best thing to do while we sit and wait to see how these tax changes have actually impacted the market. Because it's still too soon to tell. To continue lifting or decreasing rates at the moment without having data to back it up would be silly."
The RBA's next meeting on monetary policy is scheduled for 15 to 16 of June.
