The likelihood of a fifth interest rate hike by the Reserve Bank of Australia (RBA) on Melbourne Cup Day has increased following remarks from Andrew Hauser, the RBA's deputy governor. He indicated that the inflation outlook has significantly worsened, leading to "hard choices" for the central bank.
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Speaking at an investment bank conference in Sydney on Wednesday, Hauser noted that RBA board members are confronted with a declining economy while facing concerns that Australians might be losing confidence in the bank's ability to control inflation, which is currently above the target of 2.5%. "We’re in a world of hard choices. I think that’s the reality here,” he stated.
Financial markets reacted to Hauser’s comments, raising the probability of a rate increase on November 3 from 30% to 45%. If enacted, this would mark the fifth rate hike for the year, bringing the RBA's official cash rate target to 4.85%, its highest level since the global financial crisis.
The ongoing conflict in the Middle East has contributed to an inflation rate of 4% as of August, with Hauser noting that businesses have begun to accept 3.5% inflation as the "new normal." He warned that achieving a stable inflation mindset may necessitate further interest rate rises.
However, Diana Mousina, AMP’s deputy chief economist, suggested the likelihood of a rate hike in November is not assured, especially considering the recent signs of a weakening job market and the RBA's previous response to rising price pressures.
Mousina emphasized that the upcoming inflation figures, due next Wednesday, could be pivotal in determining if mortgage holders will face another increase. Hauser acknowledged the complexities of communicating to the public about the implications of rate hikes during times of external shocks, such as rising oil prices.
He explained that while inflation is currently too high, the economic picture remains mixed. Hauser pointed to the recent job figures, which revealed an unemployment rate of 4.7%, the highest in five years, as a sign of weakened labor market conditions. He highlighted the need for a period of below-trend growth to help curb inflation, indicating it is already occurring.
Despite these challenges, Hauser referenced strong economic growth among Australia’s major trading partners in Asia and a surge in data center investments, complicating the RBA’s decision-making process. He outlined two difficult choices ahead: taking additional measures to combat inflation at the risk of further weakening economic activity or maintaining current policies to safeguard the labor market while risking entrenched inflation expectations.