All four big banks are forecasting another cash rate rise in May, with ANZ the last to lock in a hike that would come just a week before the federal budget.
ANZ made the change to its forecasts this week following the release of January inflation data, which came in hotter than markets had anticipated.
Head of Australian economics Adam Boyton said a “series of upwards inflation shocks” were behind the bank’s change of forecast, adding “the most likely path of policy” would be a rate hike in May rather than its previous assumption for a hold.
Underlying inflation, known as the trimmed mean, rose 3.4% over the 12 months to January, up from 3.3% in December, while headline inflation remained at 3.8% for the second consecutive month.
Both figures are well outside of the Reserve Bank of Australia’s (RBA) 2-3% target range, strongly indicating another rate hike could come either next month or in May.
Inflation in January was higher than markets had expected. Picture: Darrian Traynor
A change to the cash rate in early May would come just a week before the Labor Government hands down the 2026 federal budget, increasing pressure on the party to square up lingering concerns around overspending.
March or May?
Market expectations for a hike jumped from 9% to 13% on the Australian Stock Exchange tracker on 25 February, following the release of the January inflation data.
Despite this, Mr Boyton warned against reading too much into previous RBA patterns.
“The RBA has also made it clear that it is not on a predetermined path for policy, as reflected in the comment from the most recent minutes,” he said.
RBA governor Michele Bullock has acknowledged the bank's forecasting is highly uncertain. Picture: David Gray
“The tone of recent communication from the central bank, including the extract from the February meeting minutes above, also suggests the board is in no hurry to push rates higher.”
The minutes from the RBA’s February meeting, published last week, suggested more rate hikes are firmly on the horizon.
Updated economic forecasts from the bank show it is using a technical assumption that the cash rate could hit 4.45% by mid-2028 – levels not seen since 2011.
While a technical assumption is only a “what-if” number used as a starting point for forecasting, it sits alongside confirmation of the board’s concerns about strong borrowing levels and spending, as well as the effects of the strong housing market on inflation.
Despite this, Deloitte Access Economics partner and economist Stephen Smith said the bank is likely to remain cautious and follow a ‘wait and see’ approach.
“That cautious approach would be consistent with the finely balanced outlook for 2026,” he added.
“Consumer spending and business investment had been slowly strengthening and were expected to underpin a gradually improving economic picture this year.”
Budget day approaching
Holding off on a decision until May will allow the bank ample time to reflect on March quarter inflation data, as well as waiting on further labour market indicators and the next national accounts.
The 2026 Federal Budget will be handed down in parliament on 12 May. Picture: Getty
“The federal budget will then be handed down a week later, making May a pivotal month for the Australian economy and one that might set the economic tone not just for 2026 but for several years beyond,” Mr Smith added.
“Unless the federal budget meets the moment and outlines significant economic and tax reform, growth will stagnate and inflation will persist for longer than necessary.”
“As the Reserve Bank wrestles with limp supply growth, it is fiscal policy that holds the key to lifting the pace of growth and bringing inflation back to target.”
This article first appeared on Mortgage Choice and has been republished with permission.
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