Following the Reserve Bank of Australia's parliamentary testimony last week, National Australia Bank has adjusted its expectations for the timing of future movements in the official interest rate.
According to a statement by the bank's chief economist Alan Oster, NAB now expects a considerable period of inaction by the RBA.
"We have removed our previous forecast of a 25 point hike in December 2011," Mr Oster said.
"We still however continue to expect the direction of the next move in the cash rate to be up – albeit not till mid 2012."
Mr Oster said the downside risks to the Australian economy have built over the past few months.
Concerns for international growth prospects have been reflected in sharp falls in Australian equity markets since the last week of July which, if sustained, are likely to weaken consumer spending and erode business confidence.
This has come at a time when indicators of the Australian economy, such as employment growth and business conditions reported in the NAB Business Survey, have slowed, tempering expectations for economic growth in the second half of the year.
While Mr Oster expects GDP growth to recover strongly in the second half of 2011, as coal exports gradually recover and investment growth strengthens on the back of the record high terms of trade, he said the RBA Board is unlikely to change rates in the near term.
"Risks to the interest rate outlook are now evenly balanced. If recent volatility and uncertainty continue for some time there are clear downside risks to the Australian economy. In those circumstances the current structural adjustment in the labour market could well see unemployment drift higher. Consumers would respond by saving more and business would delay investment and attempt to cut costs. That, however, would represent a further marked slowing in local and international activity from that currently being reported – or forecast by either NAB or the RBA. Hence we do not see the likelihood of rate cuts for some time even in that scenario," he said.
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