RBA flags materially worse inflation outlook as November rate hike odds rise in Australia

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RBA flags worse inflation outlook

Highlights

Reserve Bank of Australia deputy governor Andrew Hauser warns inflation outlook is 'materially worse' than forecast, with current inflation at 4% versus the 2%-3% target.
LSEG data show markets now price a 42% chance of a November rate hike, up from below 20% last week after unemployment hit a five-year high of 4.7%.
RBA signals tight monetary policy may continue as businesses expect inflation to persist around 3%–3.5%, risking entrenched higher price expectations in Australia.

Inflation warning ahead of November decision

As reported by ABC News, Reserve Bank of Australia deputy governor Andrew Hauser says the inflation outlook is "materially worse" than the central bank had forecast, increasing the prospect of another interest rate rise as soon as November.

Speaking at the Citi Investment Conference in Sydney, Hauser says high inflation is becoming entrenched in the Australian economy. He says the RBA is beginning to see signs that some people in the community are unsure whether inflation will return to target at all, or at least not for an extended period.

The RBA targets headline inflation between 2% and 3% on average over time. Inflation currently stands at 4%, according to the August consumer price index. Hauser says the bank's liaison program and surveys show a rising share of businesses are starting to think inflation around 3% to 3.5% could become the new normal, a shift he describes as a "central banker's nightmare" that cannot be allowed to take hold.

Market and household implications

LSEG data show markets now price a 42% chance of a rate hike in November. That is up from below 20% last week, when the unemployment rate reached a five-year high of 4.7% in September.

Hauser says the RBA faces hard choices as it balances pressure on prices from the Middle East crisis, the AI and technology boom, and weak productivity growth. Responding to concerns about the burden of higher rates on households already under cost-of-living pressure, he says the short-term pain is intended to avoid longer and potentially worse damage if inflation expectations become locked in.

He also downplays concern about the jobs market, saying there may be some noise in the latest numbers, although the outcome is a little weaker than the RBA and others expected. Hauser says no lost job is welcome, but adds that the labour market needs to soften and that some easing in the economy is necessary.

In our earlier article on UBS Global Wealth Management’s outlook for the Federal Reserve, we covered how persistent inflation led the bank to project a longer tightening cycle, including additional rate hikes into 2027. We also noted that markets were rapidly repricing the likelihood of further increases as inflation proved broader and stickier, reinforcing expectations for higher-for-longer borrowing costs.

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