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Tuesday, April 24, 2012

NAB forecasts 25bps in May followed by 25bps in June

The guys over at NAB have assimilated the inflation data and have this to say:

Because the CPI was so low, with underlying inflation over the past two quarters running at an annualised pace of about 2%, right at the bottom of the target band, the RBA will need to cut its inflation forecasts and this will provide room for a cumulative 50bps of easing ahead.

Since this is not an emergency – the RBA only moves by 50bps or more in an emergency – we expect them to cut by 25bps in May and then follow up with another 25bps in June. Our previous forecasts had only one 25bps cut in May.

Moreover, with domestically generated inflation high, recording a 1% rise in the quarter (non-tradeables measure) and 3.6% over the year to the March quarter, the RBA will be cautious ahead.

The June (and any subsequent cuts which might occur) are dependent on data and events. However, because we are expecting a significant fiscal tightening in the Budget, a mild rise in unemployment ahead and soft business confidence, we now expect the RBA to follow up a May cut with another cut in June.