One of the big four banks expects the Reserve Bank of Australia (RBA) to raise interest rates six months later than previously expected, after changes were made to a key measure of inflation.
National Australia Bank (NAB) now expects the RBA to raise the overnight cash rate by a quarter percentage point in November 2012, rather than in May.
The bank updated its forecasts after the Australian Bureau of Statistics (ABS) on Wednesday announced changes to the way it calculates the consumer price index (CPI), a key measure of inflation.
As a result, NAB now says it expects core inflation to remain between 2.5 and 2.75 per cent until 2013.
“This is much softer than our previous forecasts, which showed the core inflation rate accelerating to the top of the target band by the end of 2011 and remaining elevated for the remainder of the forecast horizon,” the bank said in a statement on Thursday.
The ABS downwardly revised June quarter inflation to 0.6 per cent, from 0.9 per cent, putting inflation over the year at 2.5 per cent – well within the RBA’s target range.
NAB said it was uncertain how the RBA would respond to the downwardly revised CPI figures it but would “envisage that the RBA’s tightening bias will be reduced to a more neutral bias.”
NAB added that it expected a rate rise would still be necessary in November 2012 to address the forecast inflation of more than three per cent in 2013.
The bank says risks to the near-term interest rate outlook are “clearly skewed to the downside.”
Sustained weakness in global financial markets and a worsening in the domestic labour market could even prompt an interest rate cut.
“With near-term inflation expected to fall comfortably within the RBA’s target band, there are some triggers that may prompt a near-term rate cut.”
“Specifically, if the unemployment rate rises to above 5.5 per cent or the NAB’s Business Conditions index falls to -10 points (-3 points in August),” the bank said.
The unemployment rate rose to 5.3 per cent in August.
“On balance, NAB anticipates a long period of inaction by the RBA, before increasing rates to five per cent in November 2012.”
