ANZ bank delivers a major blow to Australians with mortgages

ANZ now expects the Reserve Bank to cut rates in May instead of February – after a fresh warning that inflation will remain higher 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.

“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,” Mr 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 forecasting a delayed rate cut in May, which is in line with the interbank futures market.

Only the Commonwealth Bank predicts another interest rate cut in February.

Ms Bullock stressed on Thursday evening that underlying inflation of 3.5 per cent – excluding the volatile price components – is still well above the Reserve Bank’s target of 2 to 3 per cent.

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

ANZ bank now expects the Reserve Bank to cut rates in May instead of February (pictured are shoppers in Sydney)

“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 inflation rate.

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 $300 electricity rebates and cheaper petrol prices.

The Reserve Bank sees the consumer price index – also known as headline inflation – rising to 3.7 percent after these power cuts end.

This means the Reserve Bank is unlikely to cut the existing 4.35 per cent rate until mid-2025, even though New Zealand and Canada now have lower equivalent policy rates than Australia – with both Commonwealth countries already cutting rates this year reduced three times.

“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.”