National Australia Bank, one of the country's largest lenders, has issued a sobering forecast for borrowers: the Reserve Bank of Australia will keep its cash rate at 4.35% through the end of 2026, with the first rate cut not arriving until mid-2027. The outlook reflects a delicate balancing act for the central bank as the economy slows but inflation remains stickier than hoped.
NAB's projection is based on its latest business survey and economic analysis, which shows softer activity across sectors even as business confidence has stabilised. The bank notes that earlier geopolitical concerns have eased somewhat, but underlying price pressures are proving persistent.
What's Driving NAB's View
The core of NAB's argument is that the RBA will need to keep policy tight for longer to fully tame inflation. While headline inflation has fallen from its peak, the bank expects underlying inflation — which strips out volatile items like fuel and fresh food — to stay above the RBA's 2-3% target band for an extended period.
NAB's June business survey pointed to a slowdown in demand, with measures of activity softening. However, the bank says this cooling is not yet sharp enough to convince the RBA that inflation is sustainably under control. At the same time, confidence has held up better than feared after earlier global shocks, suggesting the economy is not falling off a cliff.
The RBA has kept rates at 4.35% since November 2023, after raising them from a record low of 0.1% during the pandemic. The central bank has repeatedly warned that it will not hesitate to raise rates again if inflation proves stubborn, but markets have been pricing in cuts as early as late 2025. NAB's forecast pushes that timeline out by roughly two years.
What This Means for Investors
For everyday investors, NAB's call has several implications. First, it suggests that the era of cheap money is not returning anytime soon. Borrowing costs for mortgages and business loans will remain elevated, which could weigh on consumer spending and corporate profits. Sectors sensitive to interest rates, such as housing, retail, and construction, may continue to face headwinds.
Second, the prolonged period of high rates could support the Australian dollar, as higher yields attract foreign capital. That might benefit importers but hurt exporters, including miners and agricultural producers.
Third, the delay in rate cuts means savers can continue to enjoy relatively high returns on cash and term deposits. However, investors in growth assets like stocks and property may need to adjust their expectations for a slower economic environment.
NAB's view also contrasts with some other forecasts. For example, recent data showed Australia's private sector growth hitting a 2026 high in July, though confidence remained weak. That mixed picture underscores the uncertainty facing the RBA.
Broader Context
Central banks around the world are grappling with similar dilemmas. The European Central Bank recently held rates at 2.25%, warning that energy risks could keep inflation elevated. In Japan, the government has been urged to raise rates as the yen weakens, while the US Treasury has pressed Japan to tighten policy.
NAB's forecast is more hawkish than many market participants had anticipated. If the bank is correct, it would mean Australian households and businesses face another three years of high borrowing costs, a scenario that could test the resilience of the economy.
The RBA's next policy meeting is scheduled for early August, where it is widely expected to hold rates steady. Investors will be watching closely for any shift in language that might signal a change in the outlook.
For now, NAB's message is clear: patience will be required. The path back to lower rates is longer than many hoped, and the journey may be bumpy.
