- ANZ now expects a rate cut in May
ANZ now expects the Reserve Bank to cut interest rates in May rather than February, following a fresh warning that inflation will remain high for another two years.
Adam Boyton, head of Australian economics at ANZ, updated his forecasts on Friday morning, after RBA Governor Michele Bullock said inflation was unlikely to “sustainably” return to its target range until 2026.
“At turning points we should focus more on what the RBA should do rather than its rhetoric, but at this point we were hoping for a more neutral tone,” Mr Boyton said.
“With the board still focused on demand outstripping supply, our forecast for six-month annualized trimmed average inflation to fall just inside the RBA’s target band for the February meeting no longer looks sufficient.”
Three of Australia’s big four banks, including Westpac and NAB, are now forecasting a delay to the rate cut in May, which is in line with the interbank futures market prediction.
Only the Commonwealth Bank is still forecasting a rate cut in February, with an election due in May next year.
ANZ has delivered bad news to millions of home borrowers two days after the Reserve Bank of New Zealand this week cut rates for the third time this year, meaning Kiwis now have a lower cash rate than Australia.
Ms Bullock highlighted on Thursday night that the underlying inflation rate of 3.5 per cent – with volatile price elements removed – was still well above the Reserve Bank’s target of 2 to 3 per cent.
ANZ Bank now expects the Reserve Bank to cut interest rates in May rather than February (pictured, shoppers in Sydney)
“The best way to do it is to look at core inflation,” he said.
“The measure we normally use for this is trimmed average inflation and by this measure inflation was still too high at three and a half per cent over the year to the September quarter.”
Ms Bullock’s focus on core inflation is a repudiation of Treasurer Jim Chalmers, who has been focusing on the volatile headline inflation figure based on temporary and one-off factors.
Headline inflation in the year to September was at a three-year low of 2.8 per cent, but this was based on $300 electricity rebates from the federal government and cheaper gasoline prices.
The Reserve Bank expects the consumer price index – also known as headline inflation – to soar to 3.7 per cent after those energy rebates expire.
This means the Reserve Bank is unlikely to cut its current cash rate of 4.35 per cent until mid-2025.
“However, monetary policy settings will have to remain restrictive until the Reserve Bank board is confident that inflation is on track to return sustainably within the target range and approach its mid-point of 2 .5 percent,” Ms. Bullock said.
“Our forecasts published in the November monetary policy statement suggest that a sustainable return to the target will occur in 2026.”
Reserve Bank Governor Michele Bullock said inflation is unlikely to “sustainably” return to its target range until 2026.
New Zealand and Canada now have lower equivalent policy rates than Australia; both Commonwealth nations have already cut their rates three times this year.
The Reserve Bank of New Zealand on Wednesday cut its cash rate by 50 basis points to 4.25 per cent, putting it 10 basis points below Australia’s 4.35 per cent cash rate.
The Bank of Canada’s equivalent policy rate is even lower: 3.75 per cent.
This week, Dr Chalmers took advantage of volatile monthly inflation data for October which showed headline inflation grew just 2.1 per cent.
“This is another really encouraging sign that our policies are helping to reduce inflation after it was higher and rising during the Liberal government,” he said Wednesday.
“Today’s figures show that monthly inflation has remained in the Reserve Bank’s target band for three consecutive months for the first time in almost five years.”
He left out the fact that the federal government’s $300 electricity rebates caused power prices to fall 35.6 percent over the year, while gasoline prices plummeted 11.5 percent.