The chance of a fifth interest rate hike on Melbourne Cup day has jumped after Andrew Hauser, the Reserve Bank’s deputy governor, warned of “hard choices” amid a “materially worse” inflation outlook.
Hauser, speaking at an investment bank conference in Sydney on Wednesday morning, said the RBA monetary policy board members were juggling a slowing economy with fears that Australians were starting to lose faith in the central bank’s ability to bring inflation back to the 2.5% target.
“We’re in a world of hard choices. I think that’s the reality here,” he said.
“The basic fact [is] that inflation has been high for a very long time now, and we are beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back into target at all, or certainly not for an extended period,” he said.
The chance of an interest rate increase on 3 November jumped from 30% before Hauser’s comments to 45% afterwards, according to pricing in financial markets. If delivered, it would be the fifth rate rise for the year and would leave the RBA’s official cash rate target at 4.85%, from 4.6% now, and its highest level since the global financial crisis.
Sign up for the Breaking News Australia email A worsening Middle East conflict has pushed inflation to 4% in the year to August, and Hauser said businesses were starting to see 3.5% inflation as the “new normal”. Removing an entrenched inflation psychology could require higher interest rates, he warned.
But Diana Mousina, AMP’s deputy chief economist, said it was not a foregone conclusion that the RBA would move again.
“I still think it’s hard to see them hiking in November,” Mousina said, pointing to the recent evidence of a weakening jobs market and that the RBA had already responded to stronger price pressures with last month’s rate rise.
With the chance of another rate rise on a knife’s edge, Mousina said next Wednesday’s inflation figures would likely determine whether mortgage holders are hit again.
Australia’s second top central banker admitted it was difficult explaining to the public why the RBA was “laying pain on top of pain” by raising interest rates at a time when offshore shocks were driving up fuel prices.
“If someone overseas raises the price of a good that we’re buying, let’s call it oil, we’re all poorer, and we have to accept that fact,” Hauser said.
“What we can do and what we must do is prevent one-off supply shocks or persistent supply shocks feeding through into higher second-round effects, higher inflation expectations. That will just make a bad thing worse.”
While inflation was clearly too high, the picture for the economy was “more mixed”.
High interest rates and high petrol prices were weighing on activity, Hauser said. Last week’s jobs figures – which showed unemployment reaching a five-year high of 4.7% – were “a little bit weaker than people had expected”.
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“Clearly, we need a period of below-trend growth to bring inflation down, and we’re seeing that happening,” he said.
But Hauser pointed to surprisingly strong economic growth among Australia’s major trading partners in Asia, and the boom in datacentre investment. Oil prices were about a third higher than the bank had predicted in August.
This created the difficult trade-offs facing the RBA’s rate-setting board, he said. “Do you do more to tackle higher inflation, recognising that that means weaker activity, a weaker labour market?
“Or do we hold our horses to protect the labour market … mindful of the potential that there may be more downside momentum of the economy, but accept the risks in so doing that this upside inflation risk embeds [into Australians’ expectations], and that becomes more expensive to deal with?”
He added: “Those are hard choices. 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.”