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Three of the big four banks have now revised their forecasts for when the central bank will start cutting the official cash rate.
Australia and New Zealand Bank (ANZ) has become the third major bank to revise its forecast for the trajectory of the official cash rate, suggesting that the first rate cut will now take place in May 2025, rather than February.
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At the start of this month, all four major banks had expected the Reserve Bank of Australia (RBA) to begin the easing cycle in February 2025, but revisions are now being made following new data.
ANZ has not only shifted its view on when the easing cycle will begin, but also now expects just two 25-bp rate cuts to happen in total, down from three previously.
It now expects cash rate cuts in May and August 2025, taking the terminal cash rate to 3.85 per cent.
The bank said the factors prompting the change were:
- Stronger-than-expected employment growth, a lift in hours worked, and some stabilisation in forward-looking labour market indicators.
- Business conditions holding around long-run average levels.
- Confirmation that consumers had noticed stage 3 tax cuts, with a lift in consumer confidence.
ANZ said that the RBA’s tone in recent commentary remains on the hawkish side and that it had expected a more neutral tone by now.
In the ANZ Australian Economic Insight report, released on Friday (29 November), the lender’s head of Australian economics, Adam 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.”
However, it hedged by saying that “on the balance of risks, [ANZ] do not rule out a rate cut in February, though”.
Boyton said: “A lower-than-expected Q4 CPI and some softening in the labour market could prompt the RBA to cut in February, especially given that the November board minutes appeared to open the door to an early 2025 easing. However, that would require either the data between now and then to print on the downside or the board to act more pre-emptively than its current language suggests.
“The weakness in private demand and the cooling in the housing market also suggest that rates are indeed on the restrictive side. Hence, absent a shock or some other material policy easing, a rate cutting cycle still seems more likely than not, albeit off the back of lower inflation, not a collapse in activity.”
CPI inches higher
ANZ’s forecast change follows the Australian Bureau of Statistics (ABS) last week reporting a 2.1 per cent annual rise in the Consumer Price Index (CPI) for October, maintaining the lowest rate of inflation since July 2021.
Michelle Marquardt, ABS head of prices statistics, said that annual trimmed mean inflation was 3.5 per cent, up from 3.2 per cent in the previous month and similar to where it was in August.
The CPI excluding volatile items and holiday travel was 2.4 per cent in the 12 months to October, down from 2.7 per cent in September.
Housing rose 0.2 per cent in the 12 months to October, down from a 1.6 per cent annual rise to September. The large fall in electricity prices mostly offset higher rents and new dwelling prices.
New dwelling prices, which capture new builds and major renovations, rose 4.2 per cent in the 12 months to October. Growth in new dwelling prices has slowed in the past two months due to lower demand, with dwelling prices rising at the lowest annual rate since August 2021.
Three’s a crowd
ANZ joins National Australia Bank (NAB) and Westpac in revising its interest rate forecast during November.
The three majors have all pushed back their calls for the first rate cut from February 2025 to May 2025.
Westpac Group’s chief economist (and former assistant governor [economic] at the RBA), Luci Ellis, said in November that the “most likely scenario for the path of the RBA’s cash rate” was for the rate-cutting cycle to begin in May, followed by consecutive cuts.
In an economic update, she said: “Similar to the pattern in some peer economies, we expect the initial moves to be somewhat front-loaded, with consecutive cuts in late May and early July. This is also a change from our previous expectation of a moderate pace of decline of one cut per quarter.”
NAB, which was the first big four bank to revise its forecast, said last month that it had been surprised by resilience in the labour market, but still expected the unemployment rate to rise a little further before stabilising around 4.5 per cent in mid-2025, broadly in line with the RBA’s November forecast track.
“Some further cooling in the labour market and evidence of further progress in realised inflation outcomes over the next couple of quarters will ease concerns that the labour market is a source of inflation risk and provide space to ease policy to preserve full employment,” the lender said in a NAB Economics release.
The Commonwealth Bank of Australia (CBA) is the only major bank yet to revise its forecast for the cash rate to remain on hold until February 2025.
[Related: Another major pushes back rate cut forecasts]
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