RBA interest rate hike odds firm as deputy governor Andrew Hauser warns inflation outlook 'worsening'
RBA deputy governor Andrew Hauser said on Wednesday that Australia's inflation outlook 'looks materially worse' than the central bank expected two months ago, reviving talk of a fifth interest rate hike ahead of the board's 2 November meeting.
RBA interest rate hike odds firm as deputy governor Andrew Hauser warns inflation outlook 'worsening'
The RBA interest rate hike debate is back on. Deputy governor Andrew Hauser warned on Wednesday that Australia's inflation outlook now "looks materially worse" than the central bank had expected two months earlier, reviving talk of a fifth rate rise.
A warning in Sydney
Hauser was speaking at an investment bank conference in Sydney on Wednesday morning. Before his remarks, financial markets were pricing in a nearly one-in-three chance of a hike to 4.85%, with odds likely to shorten after the comments.
Why the outlook darkened
Hauser said high interest rates and high petrol prices were weighing on economic activity, and oil prices were running about a third higher than the bank had predicted in August.
- Businesses were starting to see 3.5% inflation as the "new normal", Hauser said, and entrenched inflation psychology could require higher rates to remove.
- He added that some people in the community are not sure the RBA will bring inflation back into its 2.5% target.
A slowing economy
The warning sits against softer domestic data. Last week's jobs figures showed unemployment reaching a five-year high of 4.7%, which Hauser called weaker than expected.
Hauser said a period of below-trend growth is needed to bring inflation down, and that this is happening. Yet he pointed to counterweights: surprisingly strong economic growth among Australia's major trading partners in Asia and a boom in datacentre investment.
The board's hard choices
Hauser framed the dilemma the monetary policy board faces: do more to tackle higher inflation, recognising that means weaker activity and a weaker labour market, or hold to protect the labour market while risking embedded inflation expectations.
Those are hard choices. They're not where we'd like to be ideally as the central bank.
The board begins its next two-day meeting on 2 November, with the rate decision falling on Melbourne Cup day.
