Despite the RBA and other economists referencing the Ukraine conflict as a source of economic uncertainty, NAB now expects the first cash rate hike to take place three months earlier than previously predicted.

NAB initially anticipated the first cash rate hike to come into effect this November, and that the cash rate would hit 2.50% in November 2024.

The bank has now revised its forecast and expects the first rate hike to take place in August, increasing by 15 basis points, with further increases to come in September (25 basis points) and November (25 basis points).

This would see the cash rate hit 0.75% by the end of the year - which is back to pre-pandemic levels.

The last time the RBA increased the cash rate was November 2010.

Why has NAB changed its forecast?

This new view comes alongside NAB's refreshed domestic forecasts.

NAB economists now expect the unemployment rate to dip below 4% by March, which is 'well ahead' of RBA predictions, and to hit 3.5% by the second half of 2022.

They also expect higher quarterly trimmed-mean inflation of 1% in the first half of 2022, which would put core inflation at around 2.75% by mid-2022.

They forecast gradual cash rate 'normalisation' to follow throughout 2023 and 2024.

"We see a further six hikes over two years, which sees the cash rate around 2.25% by the end of 2024," they said.

RBA Governor Dr Philip Lowe said the Bank will consider whether to reinvest bond holdings at its May meeting, something which NAB economists said the central bank is 'unlikely' to do.

The RBA has been consistently wide of the mark with its recent forecasts of key economic markers, as seen in the table below.

  Outcome Forecast Difference
(percentage points)
GDP Growth 5* +1½
Unemployment Rate 4.2 −1¼
CPI Inflation 3.5 +2
Underlying Inflation 2.6 +1
Wage Price Index 2.3 +0.55

(a) * Estimate based on available data.

Sources: ABS; RBA

What does Ukraine have to do with it?

In the Reserve Bank's most recent meeting, RBA Governor Dr Philip Lowe said the war in Ukraine could affect the economy in a few ways.

"Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand," Dr Lowe said.

"The prices of many commodities have increased further due to the war in Ukraine."

Dr Lowe said that the central forecast is for underlying inflation to increase to around 3.25% before falling back to around 2.75% throughout 2023.

"The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3% target range," he said.

Harley Dale, chief economist at Creditor Watch, also said the Ukrainian crisis provides substantial geo-political uncertainty, and that the RBA won't budge in the current environment.

"Damaging economic and humanitarian consequences have yet to play out and discussion of petrol prices here in Australia hitting two dollars a litre won’t be lost on consumers," Mr Dale said.

"The situation between Russia and the Ukraine likely throws some delay into interest rate expectations here, although we do have a highly anticipated Federal Reserve rate decision in the United States later this month."


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