Andrew Hauser, deputy governor of the Reserve Bank of Australia (RBA), has fueled new speculation about a potential interest rate hike coinciding with Melbourne Cup day. At an investment bank conference in Sydney on Wednesday, Hauser addressed the central bank's tricky job of juggling inflation risks while aiming to protect the labor market.
Hauser's comments come as the RBA deals with an inflation outlook that has worsened significantly from expectations just two months ago. He pointed out that the monetary policy board, where he sits, is confronted with 'hard choices' as it gears up for its two-day meeting starting on November 2.
Financial markets had earlier pegged the chance of an interest rate hike to 4.85% at nearly one-in-three. But Hauser's remarks are likely to increase the odds of a rate rise.
Hauser expressed concern that ongoing high inflation is undermining public trust in the RBA's ability to bring inflation back to its 2.5% target. He noted a worrying trend where businesses are settling for a 3.5% inflation rate as the 'new normal'. This could mean higher interest rates are needed to change these entrenched inflation expectations.
While recognizing that inflation remains problematic, Hauser described the overall economic situation as 'mixed'. He stressed the necessity for a period of below-trend growth to curb inflation, and noted that such a scenario is already taking shape. High interest rates and soaring petrol prices are putting a damper on economic activity, he noted.
Recent employment figures showed unemployment hitting a five-year high of 4.7%, which Hauser characterized as 'a little bit weaker than people had expected'. Yet he highlighted strong economic growth among Australia's major Asian trading partners and a boom in datacentre investment as positive signs.
Hauser also pointed out that oil prices have surged to about a third higher than the bank's August forecasts, adding another layer of complexity to the RBA's decision-making process. He outlined the tough trade-offs facing the rate-setting board: whether to take strong action against inflation, which could hurt economic activity and jobs, or to hold back and risk cementing high inflation expectations.
Hauser wrapped up by acknowledging the challenging decisions facing the central bank. 'Those are hard choices, ' he said. 'They’re not where we’d like to be ideally as the central bank, but I think that’s what we’re facing into as we meet the week after next.'
