Hopes of pre-election rate relief bolstered as ANZ shifts call

With the Albanese government holding out for interest rate cuts ahead of the impending federal election, ANZ switched its call, tipping a move lower by the Reserve Bank next month.

Adam Boyton, ANZ’s head of Australian economics, tipped the Reserve Bank would cut interest rates at its board meeting next month.

Anthony Albanese’s hopes of a pre-election interest rate cut have been bolstered after ANZ brought forward its rate cut forecast to the Reserve Bank’s February meeting, as inflation nears the RBA’s target band and household spending came in below forecasts.

A rate cut ahead of the federal election, which must be held on or before May 17, would be a political win for Labor whose support has waned as household borrowers have weathered 13 rate increases since May 2022 which has pushed the cash rate to 4.35 per cent.

The Prime Minister on Friday foreshadowed additional cost of living support ahead of the federal poll as he ended his week-long tour of Queensland and Western Australia, pointing to Labor’s efforts to stimulate wages growth and cut income taxes.

“We won’t say ‘job done’ because we don’t think it is,” Mr Albanese told Perth Radio. “We will say there’s more to do.”

ANZ’s shift came following weaker-than-expected CPI data earlier this week, which ANZ argued would bring the RBA’s preferred trimmed mean inflation measure to 3.2 per cent in the December quarter, below the central bank’s forecasts for a 3.4 per cent increase.

“We think this will be enough for the RBA to cut the cash rate by 25 basis points at its February meeting, rather than waiting until May,” ANZ’s head of Australian economics Adam Boyton said on Friday, a move that would take the cash rate to 4.1 per cent.

New consumption figures also released on Friday lent further support to the case for an interest-rate cut next month with the Australian Bureau of Statistics’ new household spending indicator rising by 0.4 per cent in November, short of economists’ expectations for a 0.6 per cent increase.

Spending on goods was stronger across the month as cost-conscious shoppers were drawn in by the Black Friday sales, however the boost from pre-Christmas discounting was not as strong as previous years. Spending on services fell marginally, the data showed.

Mr Boyton said a rate hold in February was “not off the table” if the RBA remained concerned that Australia’s still-tight jobs market could cause price pressures to intensify.

The jobless rate was 3.9 per cent in November, a level which the central bank has previously said is too low to be consistent with stable inflation.

But Mr Boyton rejected the argument that the strength of the jobs market was inconsistent with the RBA’s efforts to bring inflation to a heel.

“The sharper-than-expected slowdown in wage growth in 2024 and weaker inflation forecast for the December quarter suggest an unemployment rate at or just below 4 per cent may be consistent with underlying inflation in the band,” he added.

Former RBA assistant governor Luci Ellis, now chief economist at Westpac, argued bumper jobs growth remained an uncertainty for the RBA and risked keeping it on the sidelines until May.

“Even if inflation comes in even lower than we think, the thing that’s really working in the other direction is the labour market,” Dr Ellis said, pointing to strong employment growth in the care economy.

“It won’t continue growing at this pace forever and so the real question is: what happens when it is no longer ramping up?”

Alongside fresh jobs figures, slated for release next Thursday, economists are also awaiting more comprehensive inflation data for the December quarter due on January 29 which will be key to the RBA’s cash rate decision in February.

Bond traders have significantly ramped up their rate cut bets in recent days, with interest rate futures indicating a 78 per cent chance of a move lower in February, up from 66 per cent odds prior to Wednesday’s inflation data.