ANZ Bank announced its adjusted forecast on Friday on the back of expectations that inflation for the final quarter of 2024 will be weaker than predicted.
ANZ economists expect trimmed mean inflation, the Reserve Bank of Australia’s preferred measurement, to come in at 0.5% for the December quarter, the lowest quarterly result since the second quarter of 2021.
They say this would see the annual rate drop to 3.2% - below the RBA’s current forecast of 3.4%.
ANZ believes this "will be enough" for the RBA to cut the cash rate by 25 basis points at its first meeting of the year on February 17-18.
ANZ now joins Australia’s largest bank CBA in forecasting a February cash rate cut.
Their big four peers, NAB and Westpac, are expecting a 25-basis point cut at the RBA’s May meeting.
New year, new forecasts
It was only a year ago that mortgage holders and prospective home buyers were holding out for forecast rate cuts sometime during 2024.
These failed to materialise with the Reserve Bank saying inflation was proving “sticky” and the board would need to be convinced it could “sustainably” be brought to the target range between 2-3%.
Although headline inflation declined considerably during the year, largely on the back of generous government energy subsidies, underlying inflation proved harder to budge.
The latest monthly inflation data for November was released this week, showing an annual inflation rate of 2.3% in the 12 months to November – up from 2.1% in October.
This was largely due to the timing of energy rebates that saw electricity costs drop more than 35% in October, although remaining 21.5% lower in November.
However, the key trimmed mean inflation number fell from 3.5% to 3.2% in November, still above the RBA’s target band but enough to show underlying inflation is cooling.
Money markets were quick to jump on the data, with markets now pricing in a 78% chance the cash rate will drop from 4.35% to 4.1% in February.
But markets were also widely optimistic of a rate cut by the end of 2024 which never occurred.
As well, many analysts place little weight on monthly CPI figures which can be choppy compared to quarterly figures.
The RBA will be waiting for the all-important quarterly inflation data, due on 29 January, to provide a clearer picture.
What changes in 2025?
The February meeting will also mark the last time the RBA board will meet under its current structure.
From March, the RBA will have a split board with one controlling monetary policy, including setting the cash rate, and the other overseeing governance matters.
Before Christmas, federal treasurer Jim Chalmers appointed two new members to the monetary policy board, a move that was always going to attract speculation in an election year where a cut to the cash rate would be helpful for the government’s re-election chances.
But that new-look board won’t deliberate on the cash rate until the next scheduled monetary policy board meeting on 31 March-1 April.
Reserve Bank governor Michele Bullock will remain a member of both boards.
Other data in the mix
The board will also take into account retail trade data released this week which showed Australians continued to spend up in extended Black Friday sales, with retail sales up 0.8% in November compared to the previous month.
The figure was also 3% higher than in November 2023.
But analysts suspected the jump was Christmas spending brought forward, which has been a recent trend in Australia’s retail sales data as Black Friday spending has gained traction.
Last year, December’s figure reversed after a similar November jump.
The November figure was still below market expectations of a 1% rise in retail spending.
Analysts agreed the retail data at this time of year makes it difficult to get a read on the underlying strength of consumer spending given there’s likely to be a significant contraction next month.
Two rate cuts for 2025
ANZ has followed up its prediction of a cash rate cut in February with another predicted 25-basis point cut in August.
Its economists noted the RBA had said in its December minutes that “if the future flow of data continued to evolve in line with, or weaker than, their expectations, it would further increase their confidence that inflation was declining sustainably towards target”.
However, they also conceded a hold in February is “not off the table” if the RBA puts more weight on concerns that persistent tightness in the labour market could still pose upside risks to inflation.
December’s unemployment data will give a clearer picture of the labour market when it is released on Thursday.
ANZ is forecasting the unemployment rate to come in at 4%, marginally higher than the November figure of 3.9%.
Australia’s unemployment rate has remained relatively low as inflation has dropped, in theory making the RBA less likely to make a rate cut in a bid to maintain full employment.
Low unemployment can also fuel inflationary spending so, just as in 2024, there is much for the RBA to consider.
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