RBA Deputy Governor Warns Inflation Outlook Has "Markedly Deteriorated," November Rate Hike Odds Rise to 43%

Reserve Bank of Australia Deputy Governor Andrew Hauser said on Wednesday that Australia's inflation outlook looks "markedly worse" than the RBA's August forecasts, with rising oil and technology product prices and persistent domestic pressures as the main reasons. Asked during a fireside chat on Wednesday about the prospects for a rate hike at the RBA's early-November policy meeting, Hauser said: "We are seeing higher AI prices, technology prices feeding through into the consumer price index (CPI)." He also said Australia is experiencing a data center construction boom, which will also push up inflation, along with domestic capacity pressures. Hauser added that oil prices are currently about one-third higher than the level the RBA forecast in August, while fiscal interventions are providing less of a buffer against the impact on Australian consumers. Swap data shows traders are now pricing about a 43% chance that the RBA will raise rates at its November 3 meeting, up from about 30% before Hauser's remarks. The data also shows the market has almost fully priced in a 25 basis point hike by February next year, earlier than the previously expected May. The Australian dollar held above 70 US cents, while the policy-sensitive Australian three-year government bond yield edged higher. Sean Callow, senior analyst at ITC Markets in Sydney, said, "Hauser seems very unsettled by the third-quarter inflation picture. He may once again be playing the role of 'bad cop,' warning of an imminent rate hike." Hauser's remarks came less than two weeks before the RBA's policy meeting, which will assess whether the economy is gradually returning to balance or whether further rate hikes are needed to curb inflation. The key to that assessment will be third-quarter inflation data due next Wednesday. The market expects the data to show consumer prices failing to return quickly to the RBA's 2%-3% target range. Hauser also warned of the risk that high inflation becomes embedded in expectations. "The basic fact is that inflation has been high for a long time, and we are starting to see some signs that some people in society are not sure whether we can actually get inflation down to target, or at least not for a long period," he said. He added that a growing number of businesses see 3% to 3.5% inflation as a "new normal," calling it "a central bank's nightmare." The RBA raised rates at the end of September, lifting them to 4.6%, the highest level in 15 years, in an attempt to curb accelerating prices. RBA Governor Michele Bullock's remarks after the hike were interpreted as slightly dovish, in contrast to the central bank's earlier hawkish policy statement and meeting minutes. Since then, rising unemployment has prompted traders to scale back rate hike expectations. Hauser on Wednesday also acknowledged the latest signs of weakness in the labor market. Earlier this week, RBA Assistant Governor Christopher Kent said the labor market was softening faster than expected. "We clearly have a dual mandate," Hauser said, noting the need to choose between protecting the labor market and risking inflation staying elevated. "These are difficult choices. As a central bank, we don't want to be in this position. But I think that is the situation we will face at our next meeting."