‘Big spending plans’ mean years of rate pain, ANZ chief Shayne Elliott warns

ANZ boss Shayne Elliott has warned that Australia must prepare for higher-for-longer interest rates, with baked-in government spending pressures set to make inflation sticky.

ANZ chief executive Shayne Elliott has warned that Australia must prepare for higher-for-longer interest rates, with baked-in government spending pressures through to the end of the decade from infrastructure, housing and the climate transition set to make inflation sticky.

The big four bank boss believes there could be another official rate hike early next year, with the Reserve Bank determined not to let inflation rise again.

But his bigger concern is the real prospect that interests rates won’t be cut over the coming year.

“You have to stand back and forget next year – just think about over the next five years. Everything Western governments, including Australia, want to do is fundamentally inflationary,” he said.

Increased spending on defence, housing, the NDIS, the climate transition huge road and rail projects was desirable but generally “those things are going to be inflationary”, he said.

“Even in the very short term, higher levels of immigration are adding growth pressures to the Australian economy.

“As a community, we will need to make a choice over whether we push ahead with the massive infrastructure building ambition or lower interest rates.

“If we still want to do all those things, something else has to give.

“As I sit back and think about the balance sheet of pressures: inflation versus pushing prices down. It’s on one side of the ledger, and that suggests that inflation may be stickier for longer.”

Mr Elliott was speaking to The Australian in the Vietnamese city of Saigon. The ANZ boss was there for the 30-year anniversary celebration of the bank presence in the fast-growing Asian country.

Even with last week’s official data showing inflation cooling, it remained too high and this suggests the Reserve Bank “may have more work to do in the New Year” with another cash rate hike, he said. The RBA board will meet for the last time this year on Tuesday.

Last week, National Australia Bank boss Ross McEwan said the RBA had probably lifted rates enough for this cycle, while the Commonwealth Bank has put on the agenda the chance of an official rate cut some time next year.

A competition tribunal hearing on ANZ’s bid to buy Suncorp Bank is due to begin on Monday. Picture: AFP

Mr Elliott said “on average” the Australian economy was performing well, although renters and newer home borrowers were feeling the pressure. The ANZ boss said Suncorp remained at the top of his priorities for the coming year, though the bank had a battle on its hands to secure the deal.

A competition tribunal hearing is scheduled to begin on Monday, with ANZ challenging the Australian Competition & Consumer Commission’s decision in August to block its planned $4.9bn buyout of Suncorp Bank.

Mr Elliott said the acquisition represented “a massive opportunity for us to really turbocharge our investment in Queensland”, adding 700 technology jobs.

The tribunal’s decision should be known early next year. The ACCC has argued the buyout of the regional lender would be harmful to competition.

Mr Elliott has also dismissed pointed criticism from CBA boss Matt Comyn over ANZ stoking the mortgage price wars with deep discounts. In recent weeks, Mr Comyn said he planned to sit on the sidelines in some parts of the market, describing ANZ as suffering the “largest margin erosion” in Australian bank history because of its behaviour. Mr Comyn labelled the strategy as “bewildering”. But Mr Elliott was defiant, saying the comments “tell a lot about their own ­position”.

“They’re losing share for the first time in 15 years. That’s going to be a wake-up call,” he said.

Even so, the mortgage margin squeeze was behind a sharp sell-off in ANZ’s shares despite the bank recently handing down a record annual cash profit of $7.4bn. ANZ’s shares continue to trade at a 4 per cent discount since the release of the full-year results last month. Brokerage Jarden said ANZ’s margin squeeze was “materially worse” than those of rivals, and the outlook for the bank was set to become more challenging.

Mr Elliott said his mortgage strategy remained “absolutely sustainable” and worked with ANZ’s massive technology ­investment. “The whole purpose of us re-platforming our business is to put it onto a lower cost platform, ANZ-Plus, for the long term,” he said. “That means we can continue to drive good prices for customers and generate a fair return to shareholders. That’s what we’re doing.”

Mr Elliott says his tech strategy, built around last year’s rollout of ANZ Plus, was responding to the “existential crisis” retail banking in Australia had gone through since the GFC.

“In 2009 when a customer walked into a bank – any bank – and got a home loan, the return equity of that home loan in those days was 35 per cent. Why? Because you didn’t need a lot of capital. And the margins were pretty healthy.

“Today, that same customer walks into the room, the third of the loans are barely above cost of capital. It’s barely profitable. And why? Because the regulators have demanded we hold a lot more capital. And competition from brokers and new entrants like Macquarie has driven better outcomes for customers.” This was why building ANZ Plus had been so important, Mr Elliott said, allowing the “smaller” big four bank to lower costs and deliver better customer outcomes.

The reporter travelled to Vietnam as a guest of ANZ.