All four major banks are forecasting another rise in cash rates in May, with ANZ the latest to lock in a hike that would come just a week before the federal budget.
ANZ changed forecasts this week after releasing January inflation data, which was warmer than markets expected.
Australian economics chief Adam Boyton said a “series of upward inflation shocks” were behind the bank’s change in forecasts, adding that “the most likely policy path” would be a rate hike in May rather than the previous assumption of a rate cut.
Underlying inflation, known as the trimmed average, rose 3.4% in the 12 months to January, up from 3.3% in December, while headline inflation remained at 3.8% for the second month in a row.
Both figures are well outside the Reserve Bank of Australia’s (RBA) target of 2-3%, strongly suggesting another rate hike could come next month or in May.
A change to the cash rate in early May would come just a week before the Labor government hands over the 2026 federal budget, increasing pressure on the party to address ongoing concerns about overspending.
March or May?
Market expectations for an increase rose from 9% to 13% on February 25 on the Australian Stock Exchange tracker, following the release of January inflation data.
Despite this, Mr Boyton cautioned against reading too much into previous RBA patterns.
“The RBA has also made it clear that it is not on a predetermined policy path, as reflected in comments from the most recent minutes,” he said.
“The tone of the central bank’s recent communications, including the extract from the February meeting minutes above, also suggests the board is in no hurry to push rates higher.”
The minutes of the RBA’s February meeting, published last week, suggested that more rate hikes are firmly on the horizon.
Updated economic forecasts from the bank show that it is making a technical assumption that cash rates could reach 4.45% by mid-2028 – levels not seen since 2011.
While a technical assumption is merely a “what-if” number used as a starting point for forecasts, it comes with confirmation of the administration’s concerns about high levels of credit and spending, as well as the effects of the strong housing market on inflation.
Despite this, Stephen Smith, partner and economist at Deloitte Access Economics, said the bank is likely to remain cautious and adopt a wait-and-see approach.
“That cautious approach would be consistent with the balanced outlook for 2026,” he added.
“Consumer spending and business investment have been slowly picking up and are expected to support a gradually improving economic picture this year.”
Budget Day is approaching
Postponing a decision until May will give the bank enough time to consider inflation data for the March quarter and wait for further labor market indicators and the next national accounts.
The 2026 federal budget will be tabled in parliament on May 12. Photo: Getty
“The Federal Budget will then be announced a week later, making May a pivotal month for the Australian economy and one that could set the economic tone not just for 2026, but for several years beyond,” Mr Smith added.
“Unless the federal budget delivers the right timing and outlines significant economic and tax reforms, growth will stagnate and inflation will persist longer than necessary.”
“As the Reserve Bank grapples with weak supply growth, fiscal policy is key to boosting the pace of growth and bringing inflation back to target.”
This article first appeared on Mortgage choice and is republished with permission.
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