Tide turning on Reserve Bank rate cut expectations
The mood has turned against further rate cuts as employment data convinces more forecasters that the Federal Reserve’s expansionary cycle is over.
NAB on Thursday became the latest major bank to abandon its call for a rate cut in 2026 after the Australian Bureau of Statistics reported a greater-than-expected 42,000 increase in employment in October.
The unemployment rate fell from 4.5 percent to 4.3 percent, and economists who predicted that the rate would fall to 4.4 percent were also wrong.
NAB economists say that alongside a still-tight employment market, inflation is on track to be suppressed above the Reserve Bank’s two to three per cent target range for the next six months, activity is accelerating and the economy is showing signs of reaching full capacity.
The assessment follows comments earlier this week from Reserve Bank deputy governor Andrew Hauser, who revealed the central bank forecast the economy was at its strongest starting point towards an economic recovery in more than 40 years.
“If the acceleration in growth starts from high levels of capacity utilization and a labor market near full employment, there may be little or no tolerance for above-trend growth,” said NAB economists Sally Auld, Gareth Spence and Taylor Nugent.
“In this environment, the RBA will have increased sensitivity to upward surprises in growth and/or inflation.”
NAB’s call puts it in line with the Commonwealth Bank, making them the first two major banks to predict the end of the rate cut cycle.
Nomura economists Andrew Ticehurst and David Seif predicted more forecasters would embrace that perspective as consensus shifted to no further cuts.
“We sometimes joke that data (and markets) can be hard to predict, but ‘forecasters’ have it easier, and following this announcement we wouldn’t be surprised to see others switch to our ‘RBA done’ view in the coming days and weeks,” the pair said.
Commonwealth Bank economist Harry Ottley said leading indicators showed no dramatic softening in the labor market was expected to cause the Reserve Bank to have second thoughts about staying put.
Mr Ottley said vacancy data and business responses to employment surveys showed employers were still struggling to find suitable workforce, while Commonwealth Bank’s internal data also held up and provided further confidence that job growth would remain robust in the future.
“The labor market is a lagging indicator and so the improvements we see in economic conditions should lead to better employment growth, particularly in the market sector.”
But Westpac economist Ryan Wells said a deeper dive into the data showed the unemployment rate was still rising steadily.
“After smoothing out some of this monthly volatility with the three-month average, the overall unemployment rate is still clearly following a gradual upward trend,” Mr. Wells said.
ANZ economists Aaron Luk and Adelaide Timbrell confirmed their view that another interest rate cut would be made in February, while Westpac predicts that the Central Bank will cut interest rates in May and August.
Australia’s Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national news channel and has been providing accurate, reliable and fast-paced news content to the media industry, government and corporate sector for 85 years. We inform Australia.
