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NAB Tips No Rate Cut In May

A May interest rate cut may not be the done deal many had expected, with one of Australia's biggest lenders tipping the Reserve Bank will stay on hold while it looks for signs of improvement in the economy.

Most economists expect the RBA to cut the cash rate a quarter of a percentage point to a new record low of two per cent at its May meeting as it looks to boost lacklustre economic growth.

But National Australia Bank on Thursday broke with the pack, tipping the RBA to keep the cash rate unchanged until August.

The bank's economists pointed to a string of recent positive or better-than-expected economic data as a reason for the central bank to sit back and wait to see the impact of previous rate cuts.

"On the economy, recent readings on retail sales, dwelling investment, and business conditions have all improved and have led us to revise up our near term domestic demand forecast modestly," they said.

"This is evidence that prior rates cuts are continuing to gain some traction." NAB still thinks rising unemployment is likely to force the RBA's hand in August, though it says there's a chance the economy will perform better than expected, allowing the central bank to keep the cash rate at 2.25 per cent.

Expectations of a May rate cut have also dimmed on money markets where the odds of a move have fallen from around 100 per cent to 50 per cent.

But NAB's view is at odds with most major banks, including the Commonwealth Bank, ANZ and Westpac, which continue to tip a cut. Australian Bureau of Statistics figures released on Wednesday showed headline inflation of 1.3 per cent for the year to March, well below the RBA's target two to three per cent band.

Underlying inflation came in at at 2.35 per cent, giving the RBA plenty of room to cut if it wants to.

But the RBA appears to be increasingly worried about the impact of low interest rates on the housing market, with governor Glenn Stevens on Tuesday admitting prices in Sydney "look rather exuberant".

Analysts say the record low interest rate environment has also helped push up the share prices of a number of major Australian companies, including the big four banks, as the dismal return from term deposits forces normally conservative investors to look for income elsewhere.

AAP

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