ANZ bank delivers a major blow to Australians with a mortgage

ANZ now expects the Reserve Bank to cut rates in May instead of February – after a fresh warning that inflation will remain too 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 is unlikely to return to the target range ‘sustainably’ until 2026.

‘The RBA’s tone also remains on the aggressive side. At turning points we should focus more on what the RBA should do rather than its rhetoric, but we would have expected a more neutral tone by now,” Boyton said.

‘With the board still focused on the level of demand exceeding supply, our forecast that six-month annualized average inflation at the February meeting will fall just within the RBA’s target no longer appears adequate.’

Three of Australia’s Big Four banks, including Westpac and NAB, are now predicting a delayed rate cut in May, which is in line with futures market forecasts.

Only the Commonwealth Bank predicts another rate cut in February, with elections set for May next year.

Ms Bullock also warned on Thursday evening that inflation could still rise again – calling it a ‘red flag’.

ANZ has delivered its bad news to millions of home borrowers two days after the Reserve Bank of New Zealand cut rates for the third time this year – meaning Kiwis now have a lower cash rate than Australia.

The major bank now expects just two Australian rate cuts in 2025 – in May and August – after previously expecting four more cuts in June.

Ms Bullock told Australia’s Economic Development Committee she would not hesitate to raise interest rates if inflation rose again.

“If the data that we’re seeing and the information that we’re getting from our contact and so on indicates that inflation is picking up again – so that trajectory won’t be followed, it will go the other way – then that would be the case. a very big red flag for us,” she said.

The RBA chief emphasized that the underlying inflation rate of 3.5 percent – ​​excluding the volatile price components – is still well above the Reserve Bank’s target of 2 to 3 percent.

“The best way to do this is to look at underlying inflation,” she said.

“The benchmark we typically look at for this is average inflation, and by this benchmark inflation was still too high: three and a half percent over the year to the September quarter.”

Ms. Bullock’s focus on underlying inflation is a rejection of Treasurer Jim Chalmers, who has focused on the volatile headline inflation rate based on temporary, one-off factors.

Overall 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 electricity rebates of $300 and cheaper petrol prices.

The Reserve Bank sees the consumer price index – also known as headline inflation – rising to 3.7 per cent by the end of 2025 after power cuts end.

This means the Reserve Bank is unlikely to cut the existing cash rate of 4.35 percent 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 the 2.5 percent midpoint,” Bullock said.

“Our forecasts published in the November statement on monetary policy suggest that there will be a sustainable return to the target in 2026.”

ANZ is now predicting two rate cuts in May and August, which would take the RBA cash rate back to 3.85 percent for the first time since June 2023.

They would hardly reverse the RBA’s 13 increases in 2022 and 2023, which were the most aggressive since the late 1980s.

The expected 50 basis points of relief is dramatically lower than the 100 basis points of cuts ANZ forecast in June, as unemployment remains low at 4.1 percent.

“As the economy – particularly job growth and the business environment – ​​continues to show resilience, we are also changing our view on the size of rate cuts,” Boyon said.

New Zealand and Canada now have lower equivalent policy rates than Australia – with both Commonwealth countries having already cut rates three times this year.

The Reserve Bank of New Zealand on Wednesday cut the cash rate by a further 50 basis points to 4.25 percent, putting it 10 basis points below the Australian cash rate of 4.35 percent.

The Bank of Canada’s equivalent policy rate is even lower, at 3.75 percent.

Dr. Chalmers this week used volatile monthly inflation data for October, which showed headline inflation growing by just 2.1 percent.

“This is another very encouraging sign that our policies are helping to reduce inflation after it was higher and higher under the Liberals,” he said Wednesday.

‘Today’s figures show that monthly inflation has remained within the Reserve Bank’s target for three months in a row for the first time in almost five years.’

He left out the fact that thanks to the federal government’s $300 electricity rebates, energy prices fell 35.6 percent over the year, while gasoline prices fell 11.5 percent.

Underlying inflation – which excludes volatile elements – was 3.5 percent in both the September quarterly and October monthly figures from the Australian Bureau of Statistics.

When making monetary policy decisions, the Reserve Bank of Australia looks at temporary factors that bring down headline inflation, with Australia experiencing higher levels of inflation than other countries that have already started cutting interest rates.

This means Australian borrowers are bearing the brunt, even as central banks in the United States, United Kingdom and European Union have also cut interest rates this year.

Labour’s plan to create a new, separate monetary policy council was passed by the Senate last night, with support from the Greens on the last parliamentary session of the year.

The government buckled under pressure from the Greens, who had demanded that the Treasurer retain his power to override the RBA on interest rate decisions.

That power has never been used since the Reserve Bank of Australia came into existence in 1960, with the RBA becoming independent since 1993 and formalized in 1996.