Odds of fifth interest rate hike this year likely to shorten as RBA deputy warns inflation outlook ‘worsening’

Andrew Hauser says central bank faces ‘hard choices’ as it looks to balance risks of entrenched inflation with desire to protect labour market

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Andrew Hauser, the Reserve Bank’s deputy governor, has reignited talk of a fifth interest rate hike on Melbourne Cup day, warning of “hard choices” ahead in response to an inflation outlook that “looks materially worse” than the central bank had expected two months ago.

Hauser, speaking at an investment bank conference in Sydney on Wednesday morning, said the RBA monetary policy board members were juggling a slowing economy with fears that Australians were starting to lose faith in the central bank’s ability to bring inflation back to the 2.5% target.

The deputy governor sits on the RBA’s monetary policy board, which begins its next two-day meeting on 2 November.

Financial markets earlier on Wednesday morning were pricing in a nearly one-in-three chance of a hike to 4.85% but those odds are likely to shorten after Hauser’s comments.

“The basic fact [is] that inflation has been high for a very long time now, and we are beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back into target at all, or certainly not for an extended period,” he said.

Businesses were starting to see 3.5% inflation as the “new normal”, Hauser said. Removing an entrenched inflation psychology could require higher interest rates, he warned.

Hauser said while inflation was clearly too high, the picture for the economy was “more mixed”.

“Clearly, we need a period of below-trend growth to bring inflation down, and we’re seeing that happening,” he said.

High interest rates and high petrol prices were weighing on activity, Hauser said. Last week’s jobs figures – which showed unemployment reaching a five-year high of 4.7% – were “a little bit weaker than people had expected”.

But Hauser pointed to surprisingly strong economic growth among Australia’s major trading partners in Asia, and the boom in datacentre investment. Oil prices were about a third higher than the bank had predicted in August.

This created the difficult trade-offs facing the RBA’s rate-setting board, he said. “Do you do more to tackle higher inflation, recognising that that means weaker activity, a weaker labour market?

“Or do we hold our horses to protect the labour market … mindful of the potential that there may be more downside momentum of the economy, but accept the risks in so doing that this upside inflation risk embeds [into Australians’ expectations], and that becomes more expensive to deal with?”

He added: “Those are hard choices. They’re not where we’d like to be ideally as the central bank, but I think that’s the that’s what we’re facing into as we as we meet the week after next.”