Deputy Governor of the Reserve Bank of Australia warns of “significantly worsening” inflation outlook; probability of rate hike in November rises to 43%

According to information from Zhihui Finance APP, Reserve Bank of Australia Deputy Governor Andrew Hauser stated on Wednesday that Australia’s inflation outlook appears “significantly worse” than the RBA’s forecast in August, mainly due to rising oil and technology product prices, as well as continuing domestic pressures.

During a fireside chat on Wednesday, when asked about the likelihood of a rate hike at the RBA’s early November policy meeting, Hauser said: “We are seeing higher AI and technology prices feeding through into the Consumer Price Index (CPI).” He also noted that Australia is experiencing a boom in data center construction, which will further push up inflation, in addition to domestic capacity pressures.

Hauser added that oil prices are currently about one-third higher than the level the RBA forecast in August, and that fiscal intervention measures now provide less buffer for the impact on Australian consumers.

Swap data shows that traders are currently pricing about a 43% chance of a rate hike at the RBA’s November 3 meeting, up from about 30% before Hauser’s remarks. The data also shows that the market is almost fully pricing in a 25-basis-point rate increase in February next year, bringing forward the expected timing from May next year.

The Australian dollar remains above 70 US cents, and the policy-sensitive three-year Australian government bond yield rose slightly.

Sean Carlo, Senior Analyst at ITC Markets Sydney, said, “Hauser seems to be very uneasy about the third-quarter inflation situation. He may once again play the ‘bad cop’ role, warning of another imminent rate hike.”

These remarks from Hauser come less than two weeks before the RBA policy meeting, at which the central bank will assess whether the economy is gradually returning to balance or if further rate hikes are needed to curb inflation. The key indicator will be next Wednesday’s release of third-quarter inflation data. The market expects the data to show that consumer prices have yet to quickly return to the RBA’s 2%-3% inflation target range.

Hauser also warned about the risks of high inflation becoming entrenched in expectations. He said: “The basic fact is that inflation has been high for quite a long time, and we are starting to see some signs that people in the community are unsure whether we can actually bring inflation back to target, or at the very least, whether this can happen any time soon.” He added that more and more companies now regard an inflation rate between 3% and 3.5% as the “new normal,” calling this a “nightmare for central banks.”

The RBA raised rates at the end of September, lifting them to 4.6%—the highest level in 15 years—as it tried to rein in accelerating price increases. RBA Governor Michele Bullock’s remarks after the rate hike were interpreted as somewhat dovish, contrasted with the previously hawkish policy statement and meeting minutes from the bank.

Since then, a rising unemployment rate has prompted traders to reduce expectations for further rate hikes. Hauser also acknowledged signs of fresh weakness in the labor market on Wednesday. Previously, RBA Assistant Governor Christopher Kent said earlier this week that the labor market was softening faster than expected.

“We clearly have a dual mandate,” Hauser said, noting the need to choose between protecting the labor market and bearing the risks of persistently high inflation. “These are tough choices. As a central bank, we do not want to be in this position. But I believe this is the situation we face at our upcoming meeting.”