Odds of fifth interest rate hike this year likely to shorten as RBA deputy warns inflation outlook ‘worsening’

Andrew Hauser, the Reserve Bank’s deputy governor, has reignited discussions about a potential fifth interest rate hike on Melbourne Cup day. Hauser warned of "hard choices" ahead in response to an inflation outlook that "looks materially worse" than the central bank had anticipated two months ago. Speaking at an investment bank conference in Sydney, Hauser noted that the RBA monetary policy board members are grappling with a slowing economy while also facing concerns that Australians are losing faith in the central bank’s ability to bring inflation under control.

The deputy governor emphasized that inflation has been persistently high for a long time, and signs are emerging that some Australians doubt whether the central bank will bring inflation back to its 2.5% target, or if it will take an extended period. Businesses are starting to consider 3.5% inflation as the "new normal," Hauser said. He warned that removing entrenched inflation psychology might require higher interest rates.

While Hauser acknowledged that inflation is clearly too high, he painted a more mixed picture of the economy. He indicated that a period of below-trend growth is necessary to reduce inflation, and such a scenario is already unfolding. However, high interest rates and soaring petrol prices are dampening economic activity. Last week’s jobs figures, which revealed unemployment at 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 surge in datacentre investment as positive factors.

Hauser highlighted the challenging trade-offs facing the RBA’s rate-setting board. He questioned whether to prioritize tackling higher inflation, which could lead to weaker activity and a weaker labour market, or to hold off in order to protect the labour market and accept the potential risks that could exacerbate upward inflationary pressures and inflate Australians’ expectations, making it more costly to address later.

Hauser concluded that these are "hard choices" that the central bank is facing as it meets the week after next.