Quick Read
- NAB has abandoned its August rate hike forecast.
- Consumer sentiment is at its lowest level in decades.
- Economic momentum is stalling with 0.3% GDP growth.
- NAB now anticipates a rate cut as the next move.
A Shift in Monetary Outlook
National Australia Bank (NAB) has officially reversed its forecast for an interest rate hike in August 2026, marking a significant pivot in the bank’s outlook for the Australian economy. Economists Sally Auld and Gareth Spence stated that the bank no longer expects a 25-basis-point increase, instead projecting that the cash rate will peak at its current level of 4.35 percent.
“The next move in the cash rate is likely to be down, but the timing is uncertain,” the economists noted in their latest guidance. This shift reflects a growing consensus among some major lenders that the RBA’s tightening cycle has reached its limit, despite persistent inflation figures.
Economic Headwinds and Consumer Sentiment
The policy reversal coincides with historically poor consumer sentiment readings. Data from Westpac and the Melbourne Institute show a June consumer sentiment score of 80.6 points—a level rarely seen since the survey began in 1974, comparable only to the 2008 global financial crisis and the initial onset of the COVID-19 pandemic. Notably, 70 percent of survey respondents expressed an unfavorable view of the recent federal budget.
Economic data underpins this pessimism. GDP growth slowed to 0.3 percent in the March quarter, while the unemployment rate ticked up to 4.5 percent in April. Dr. Sally Auld, NAB’s chief economist, emphasized that the economy has “lost momentum,” with business confidence remaining weak across most sectors.
Analysis: Divergence and Risks
The NAB’s pivot creates a notable divergence in market expectations. While the futures market and other financial institutions like Westpac remain more hawkish—predicting further hikes to combat inflation—NAB’s assessment focuses on the risks of “stagflation.” Should unemployment continue to trend upward while inflation remains above the RBA’s 2–3 percent target, the central bank faces a precarious balancing act.
The risk remains that if Australia cuts rates while global central banks, such as the US Federal Reserve, maintain or increase theirs, the Australian dollar could face significant downward pressure. This would increase the cost of imports, potentially fueling the very inflation the RBA is struggling to contain. For now, the focus remains on whether the RBA board will hold steady in the coming months as they monitor labor market outcomes and margin compression.