RBA deputy Andrew Hauser warns of 'hard choices' as markets weigh a hike to 4.85%
According to The Guardian, Reserve Bank of Australia deputy governor Andrew Hauser said the inflation outlook 'looks materially worse' than the bank expected two months ago, reviving talk of a fifth rate hike this year. Before his remarks on Wednesday, financial markets were reportedly pricing in a nearly one-in-three chance of a hike to 4.85% at the board's two-day meeting starting 2 November, and those odds were expected to shorten. Hauser said businesses were starting to treat 3.5% inflation as the 'new normal', against the RBA's 2.5% target, and that shifting that mindset could require higher rates. The economy is softening, though: unemployment reached a reported five-year high of 4.7%. For Indian bankers, it is a live example of a central bank torn between fighting stubborn inflation and protecting jobs, with oil prices as a common pressure point.
What this means
The core problem is expectations. Once firms and households assume prices will keep rising at around 3.5%, they set prices and wages accordingly, and a central bank may need higher borrowing costs to break that habit. A hike would make loans dearer for Australian borrowers and further slow an economy Hauser says is already growing below trend, under pressure from high interest rates and petrol prices. Holding steady protects the labour market, but in Hauser's words it risks letting inflation become embedded and 'more expensive to deal with' later. The oil angle is the one Indian readers should note: Hauser said oil prices were about a third higher than the RBA had predicted in August, a reminder of how energy costs can upset inflation forecasts. Watch the 2 November meeting outcome and how markets reprice afterward.
Most affected: Bank treasuries and forex desks tracking global rate moves
Key takeaway: Watch the RBA decision at its meeting beginning 2 November, and note Hauser's point that oil prices running about a third above the bank's August forecast have worsened its inflation outlook.
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