Odds of fifth RBA rate hike rise after Hauser warns inflation outlook is worsening

Financial markets raised the probability of another Reserve Bank of Australia rate increase on 3 November from 30% to 45% after deputy governor Andrew Hauser spoke at an investment bank conference in Sydney.

Such a move would be the fifth rate increase this year. It would lift the cash rate target from 4.6% to 4.85%, its highest level since the global financial crisis.

Hauser said the inflation outlook had become “materially worse” and that the RBA board was balancing a slowing economy against the risk that Australians would lose faith in inflation returning to the 2.5% target.

Inflation and external shocks

Inflation reached 4% in the year to August as the conflict in the Middle East worsened. Hauser said some businesses were beginning to treat 3.5% inflation as the “new normal”, warning that higher rates might be needed to reverse entrenched expectations.

He said higher prices for imported goods, including oil, made Australians poorer. The central bank’s task was to prevent temporary or persistent supply shocks from feeding into lasting inflation expectations.

Economic growth is slowing

High interest rates and petrol prices are weighing on activity. Unemployment reached 4.7%, a five-year high, while Hauser described the latest jobs figures as somewhat weaker than expected.

He also pointed to stronger-than-expected growth among Australia’s major Asian trading partners and a boom in datacentre investment. Those developments have added to the policy trade-off between containing inflation and protecting the labour market.

New data may decide the move

Diana Mousina, AMP’s deputy chief economist, said another November increase was not a foregone conclusion. She cited recent signs of a weakening jobs market and the RBA’s rate increase last month in response to stronger price pressures.

Mousina said next Wednesday’s inflation figures would likely determine whether mortgage holders face another increase. Hauser said the board must choose between accepting weaker activity and labour-market conditions or risking higher inflation becoming embedded in public expectations.