ANZ is now expecting the Reserve Bank to cut interest rates in May instead of February – following a new warning about inflation staying higher for another two years.
Adam Boyton, ANZ’s head of n economics, updated his forecasts on Friday morning, after RBA Governor Michele Bullock said inflation would be unlikely to ‘sustainably’ return to its target range until 2026.
‘The RBA’s tone also remains on the hawkish side. At turning points, we should focus more on what the RBA should do rather than its rhetoric, but we had expected a more neutral tone by now,’ Mr Boyton said.
‘With the board still focused on the level of demand exceeding supply, our forecast for six-month annualised trimmed mean inflation to fall just within the RBA’s target band by the February meeting is no longer looking like enough.’
Three of ‘s Big Four banks, including Westpac and NAB, are now forecasting a delayed rate cut in May, which is in line with futures market predictions.
Only the Commonwealth Bank is still forecasting a February rate cut, with an election due by May next year.
ANZ has delivered its bad news for millions of home borrowers two days after the Reserve Bank of New Zealand cut rates for the third time this year – meaning the Kiwis now have a lower cash rate than .
It is now only expecting two rate cuts in 2025 – in May and August – having previously expected four cuts as recently as June.
Ms Bullock on Thursday night stressed the underlying inflation rate of 3.5 per cent – with volatile price items removed – was still well above the Reserve Bank’s 2 to 3 per cent target.
‘The best way to do this is to look at underlying inflation,’ she said.
‘The measure we typically look at for this is trimmed mean 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 underlying inflation is a repudiation of Treasurer Jim Chalmers who has been focusing on the volatile headline inflation number based on temporary, 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 the federal government’s $300 electricity rebates and cheaper petrol prices.
The Reserve Bank sees the consumer price index – also known as headline inflation – soaring to 3.7 per cent by late 2025 after those power rebates expire.
This means the Reserve Bank would be unlikely to trim its existing 4.35 per cent cash rate until mid-2025, as it waits for services inflation to moderate from high levels.
‘Monetary policy settings will nevertheless need 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 midpoint of 2.5 per cent,’ Ms Bullock said.
‘Our forecasts published in the November statement on monetary policy suggest that a sustainable return to target will occur in 2026.’
New Zealand and Canada now have lower equivalent policy rates than – with both Commonwealth nations already cutting rates three times this year.
The Reserve Bank of New Zealand on Wednesday cut its cash rate by another 50 basis points to 4.25 per cent – putting it 10 basis points below ‘s 4.35 per cent cash rate.
The Bank of Canada’s equivalent policy rate is even lower at 3.75 per cent.
Dr Chalmers this week seized on volatile monthly inflation data for October showing headline inflation grew by just 2.1 per cent.
‘This is another really encouraging sign our policies are helping to get inflation down after it was higher and rising under the Liberals,’ he said on Wednesday.
‘Today’s figures show 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 $300 electricity rebates from the federal government saw power prices dive by 35.6 per cent over the year, as petrol prices plunged by 11.5 per cent.
Underlying inflation – with volatile items stripped out – was at 3.5 per cent in both the September quarter and monthly October data from the n Bureau of Statistics.
The Reserve Bank of looks through temporary factors that bring down headline inflation when making monetary policy decisions, with having higher levels of inflation than other countries that have already started cutting rates.
This means n borrowers are missing out, even though central banks in the United States, UK and European Union have also cut rates this year.
Labor’s plan to create a new, separate monetary policy board passed the Senate last night, with support from the Greens on the last parliamentary sitting day of the year.
The government caved in to pressure from the Greens who had demanded the Treasurer keep his power to overrule the RBA on interest rate decisions.
That power has never been deployed since the Reserve Bank of came into existence in 1960, with the RBA having independence since 1993 that was formalised in 1996.