- Lockdowns have hit economic predictions and lessened likelihood of interest rate rises
- Wage growth, unemployment and inflation will also move away from their band ranges
- NAB believes interest rates will be 0.5% in early 2024, rising to 1.75-2% in mid-to-late 2025
If you like your interest rates low, then you may be warmed by the news that NAB believes the central bank cash rate will remain at its current historically low level of 0.1% until Q1 2024.
That’s the latest outlook based on the current economic information, which has dampened down previous predictions of an ‘earlier than 2024’ rise in interest rates in other quarters, due to a booming economy and house prices.
NAB made this 2024 interest rate call back in February 2021, and are now sticking with it.
News of another two and a half years of historically low interest rates will be good news for the real estate industry and the current boom, and anyone wanting to borrow money at cheap rates.
Home loans can be acquired for around 2%, which can mean – theoretically – a $1 million loan may only cost $20,000 a year in repayments (interest only).
Lockdowns hit economic recovery
With prolonged lockdowns in Sydney and Melbourne, now entering their 10th and 5th weeks respectively, Australia’s recovery ‘out of Covid’ is stuttering, at best. NAB economists are predicting a -3% downturn in overall economic activity for the September quarter this year, with a return to growth afterwards.
So, it’s not the rollicking economic news we were all used to listening to earlier in 2021.
And why 2024?
“With key vaccination thresholds to start the transition to living with the virus within sight, the RBA should remain confident (despite the near-term hit to activity) that its goals of full employment and inflation being sustainably within the target can be reached by early 2024.”
NAB, in a statement
The RBA had been using quantitative easing (QE) to pump money into the economy, but had been flagging a “tapering QE policy” recently.
Meanwhile, unemployment is set to rise back to 5.6% from its current 4.6% (almost full employment) level.
This puts the economy a little back on its heels with respect to wage growth, a key RBA precondition before any rise in interest rates.
As for inflation, NAB does not state a position, and will wait to see what numbers eventuate as we move into 2020 before passing judgement. A recent inflation uptick could be an aberration, and with a slowdown in September 2021 inflation numbers may fall back in any case.
Summary and forecast
The flare-ups in Covid on the east coast will dampen the economy, and postpone the need for the RBA to raise interest rates, until early 2024. That’s NAB’s best guess for the moment.
Fuelled by low interest rates, the housing boom, which has withstood much this year, will continue, at least for now, although its growth will probably slow a little.
2022 is looking like it could be a good year for the economy.
The NAB’s current forecast is for the 0.1% central cash rate to remain until Q1 2024, when it will rise to 0.5%, and then by a further 0.25% per quarter to reach 1.75-2% in mid-to-late 2025.