RBA Deputy Governor Warns of "Significantly Deteriorated" Inflation Outlook; Probability of November Rate Hike Rises to 43%

Zhitong Finance APP learned that RBA Deputy Governor Andrew Hauser stated on Wednesday that Australia's inflation outlook appears "significantly worse" than the RBA's August forecast, citing rising oil and technology product prices along with persistent domestic pressures as the main reasons.

When asked about the prospect of a rate hike at the RBA's early November policy meeting during a fireside chat on Wednesday, Hauser said, "We are seeing higher technology prices being passed through to the Consumer Price Index (CPI)." He also noted that Australia is experiencing a boom in data center construction, which will also push up inflation, in addition to domestic capacity pressures.

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

Swap data shows that traders are currently pricing in approximately a 43% chance of an RBA rate hike at the November meeting, up from about 30% before Hauser's remarks. The data also indicates that the market has almost fully priced in a 25 basis point rate hike next February, a timeline brought forward from the previously expected May of next year.

The Australian dollar remained above 70 US cents against the US dollar, while the yield on Australia's three-year government bonds, which is sensitive to policy, edged higher.

Sean Callow, a senior analyst at ITC Markets in Sydney, stated, "Hauser seems very concerned about the third-quarter inflation situation. He may be playing the 'bad cop' role again, issuing a warning of an imminent rate hike."

Hauser's comments come less than two weeks before the RBA's policy meeting, which aims to assess whether the economy is gradually returning to balance or whether further rate hikes are needed to curb inflation. The key to this assessment lies in the third-quarter inflation data to be released next Wednesday. The market expects the data to show that consumer prices have failed to quickly return to the RBA's 2%-3% inflation target range.

Hauser also warned of the risk of high inflation becoming embedded in expectations. He stated, "The basic fact is that inflation has been high for a long time, and we are beginning to see some signs that some people in society are unsure whether we can actually bring inflation down to the target level, or at least not within a longer timeframe." He added that more and more businesses view an inflation rate of 3% to 3.5% as a "new normal," describing this as a "central bank's nightmare."

The RBA raised interest rates to 4.6% at the end of September, the highest level in 15 years, in an attempt to curb accelerating price increases. RBA Governor Michele Bullock's remarks following the rate hike were interpreted as slightly dovish, contrasting with the bank's previous hawkish policy statements and meeting minutes.

Since then, rising unemployment has led traders to reduce their expectations for rate hikes. Hauser also acknowledged on Wednesday the latest signs of weakness in the labor market. Earlier this week, RBA Assistant Governor Christopher Kent stated that the labor market was softening faster than expected.

"We clearly have a dual mandate," Hauser said, pointing out the need to choose between protecting the labor market and bearing the risk of persistently high inflation. "These are difficult choices. As a central bank, we do not wish to be in this position. But I believe this is the situation we will face at our next meeting."