RBA to deliver monster cash rate cut in May: NAB

NAB has dramatically revised its outlook for the cash rate, now predicting a 50 basis point cut in May that would take the rate to 3.60%. 

The cut, if delivered, would be the largest since the early days of the pandemic and would follow a 25 basis point reduction in February.

The bank expects this to kick off a series of rate cuts, with 25 basis point moves in July, August, November, and February, ultimately bringing the rate to 2.60% by early 2026 – a steep fall from today's 4.10%.

Home loan borrowers could pocket $7.5k in annual savings

If all the above cuts – a total of 1.5% worth – occur and are passed on by lenders in full, the typical Australian home loan borrower could see a variable rate of 4.6% p.a., down from the current average of 6.1% p.a. on new variable rate owner-occupier loans (RBA, February).

That could see the monthly repayments on an average mortgage ($666,000 in the December quarter, as per Australian Bureau of Statistics data) fall by more than $620 – from $4,036 a month to $3,414.

That could bolster homeowners' budgets by close to $7,500 per year.

How much could you save? Use our Mortgage Repayment Calculator to find out

Tariff fears to drive interest rates lower: NAB

"Much has changed since the RBA board last met … [and] a restrictive policy stance in Australia is no longer appropriate, in our view," NAB chief economist Sally Auld said.

The big bank anticipates negative growth, both onshore and abroad, which could force the RBA to slash the cash rate to below the inflation rate in order to bolster growth.

It comes after ANZ also updated its cash rate forecast on Friday.

The smallest of the big four – which previously only expected one more cut in this cycle – now predicts the RBA will hand down three cuts this year.

ANZ forecasts a 25 basis point cut in May, July, and August, leaving the cash rate at 3.35%, but noted it "would not rule out a 50 basis point cut in May, if sentiment sours and the global growth outlook deteriorates sufficiently".

"The RBA needs to play catch up," Dr Auld said.

"With longer periods between RBA board meetings now a feature of the RBA calendar, some flexibility on the policy front has been lost, especially when developments are moving fast."

The RBA board now meets just eight times per year, a decrease from the 11 annual meetings held prior to 2024.

The tariffs imposed by US President Donald Trump, many of which are now subject to a 90-day pause, are a significant talking point in NAB's latest note.

It's unclear whether the bank's predictions accommodate the pause, announced in the early hours of Thursday.

While the direct impact of the tariffs on Australia will likely be minor, the indirect effects – lower consumer and business confidence, weakening commodity prices, and market volatility – could push the RBA to cut.

"We would also note that the situation remains quite fluid at present; hence there are large bands of uncertainty to our modal forecasts," Dr Auld said.

"Should the likely tariff regime in the US settle at a less severe outcome, then the RBA may have scope to consider a more gradual policy adjustment."

Market prices in 50bp cut in May

It's not just NAB expecting a monster cut next month.

Even Treasurer Jim Chalmers weighed in, noting recent market expectations that the next RBA meeting could bring a 50 basis point cut this week.

Since Dr Chalmers' comments, traders have doubled down, with more than three quarters (77%) forecasting the cash rate to be dropped to 3.35% in May as of Wednesday's market close, as per the ASX's RBA Rate Indicator.

However, the remaining big four banks – CommBank and Westpac – haven't yet echoed this outlook.

Both still anticipate a 25 basis point cut in May, with CommBank tipping further cuts in May, August, and November, and Westpac forecasting three more cuts before the year is out.

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