The National Australia Bank has become the first major bank to change its interest rate forecast and now sees the Reserve Bank lifting rates at the board meeting next month.
In a note issued yesterday the bank’s economics team said the change had followed "Recent comments from the Reserve Bank of Australia (which) look designed to prepare financial markets for a near-term rise in the cash rate."
The NAB said this had caused the team to "adjust their expectations for the timing of future movements in the official interest rate."
"While we have left our medium term interest rate forecast unchanged, expecting the cash rate to reach 5.5 per cent by the end of 2011, we are bringing forward the timing of the next 25 basis point rate rise from early 2011 to the central bank’s next board meeting on 5 October.
"With some recent abatement in global economic concerns, RBA Governor Glenn Stevens signalled in a speech on Monday that the Board were strengthening their focus on the upside risks to inflation.
"His sentiment that ‘the task ahead is likely to be one of managing a fairly robust upswing’ reiterated RBA communication following the September 7 Board meeting that higher interest rates would be required at some point in the period ahead.
"The tone of recent RBA language has echoed that published after the September 2009 and February 2010 meetings, both occasions that were immediately followed by a 25 basis point rise in the cash rate."
NAB Group Chief Economist, Alan Oster, said the combination of the stronger-than-expected June Quarter National Accounts, continued improvement in the Australian labour market and some calming in international financial markets has induced the RBA to prepare the market for a policy tightening in October.
"Until recently, Reserve Bank officials seemed to be signalling that interest rates were around average and growth was close to trend.
“There are now enough straws in the wind for us to believe that the tightening phase may well begin sooner rather than later and probably before the release of the next CPI reading in late October," Mr Oster said.
The changed timing of future rate rises has led us at NAB to revise their Australian Dollar/US Dollar forecasts.
"We now expect the value of the Australian Dollar to peak at 0.96 US cents in March 2011 (previously peaking at 0.94 US cents in June 2011)."
That might be a bit pessimistic as the Aussie dollar hit new 25 month highs yesterday of 95.63 USc and looks to want to run higher.
The NAB statement said "Financial market pricing is currently reflecting a 60 per cent probability that the RBA Board will raise the official interest rate on 5 October and a rate of 5 per cent by December 2011.
"This contrasts with our expectation of a cash rate of 5.5 per cent by the end of 2011."
