ANZ bank delivers a major blow to Australians with a mortgage

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 Australian 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. 

‘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 Australia’s Big Four banks, including Westpac and NAB, are now forecasting a delayed rate cut in May, which is in line with the interbank futures market.

Only the Commonwealth Bank is still forecasting a February rate cut.

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 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, even though New Zealand and Canada now have lower equivalent policy rates than Australia – with both Commonwealth nations already cutting rates three times this year. 

‘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.’

Reserve Bank Governor Michele Bullock said inflation would be unlikely to ‘sustainably’ return to its target range until 2026