Macro
RBA's Hauser says Australia's inflation outlook is 'materially worse', keeping a November rate rise in play
The deputy governor's warning pushed market odds of a fifth increase this year to about 40% a week before quarterly inflation data.
HedgeWeekly News Desk ·
Reserve Bank of Australia Deputy Governor Andrew Hauser said on Wednesday that the inflation outlook had turned "materially worse" than the central bank had expected, partly because of higher oil prices. Speaking at a Citi investment conference in Sydney, he described the board's choice as whether to do more against high inflation or hold off to protect the labour market, and said staff were still finalising their quarterly forecasts.
Markets leaned towards another increase. Pricing implied about a 40% chance that the RBA lifts its cash rate to 4.85% from 4.60% at its November 2-3 meeting, up from about 30% at the start of the week, and a further rise is fully priced by May, Reuters reported. The Australian dollar climbed above 70 US cents to a two-week high of 0.7017, according to FXStreet.
Hauser acknowledged that policy was working and the jobs market was cooling, with unemployment at a five-year high of 4.7% in September. But he said the bank could not allow inflation expectations to drift from its 2-3% target, noting that a growing share of businesses now regard inflation of 3-3.5% as normal, ABC News reported. The RBA has already raised rates four times this year, most recently by 25 basis points on September 29.
Why it matters: Australia is an early test of how central banks respond to the Gulf oil shock when growth is already softening. Brent traded around $108 a barrel, up from $102 when the RBA last met and about a third above the level assumed in its August forecasts, according to Reuters. The next marker is September-quarter CPI on October 28, which Reuters says could show headline inflation rising to 4.0% with core near 3.5%. The rate decision and new forecasts follow on November 3, with implications for Australian front-end yields and the currency.