Andrew Hauser, the Reserve Bank’s deputy governor, has reignited talk of a fifth interest rate hike on Melbourne Cup day, warning of “hard choices” ahead in response to an inflation outlook that “looks materially worse” than the central bank had expected two months ago. 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. The deputy governor sits on the RBA’s monetary policy board, which begins its next two-day meeting on 2 November.
Financial markets earlier on Wednesday morning were pricing in a nearly one-in-three chance of a hike to 4.85% but those odds are likely to shorten after Hauser’s comments. Businesses were starting to see 3.5% inflation as the “new normal”, Hauser said. Removing an entrenched inflation psychology could require higher interest rates, he warned.
Hauser said 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”.
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.
They’re not where we’d like to be ideally as the central bank, but I think that’s the that’s what we’re facing into as we as we meet the week after next.”
Extract — continue reading at the source.
