Australia's Inflation Outlook Worsens, Increasing Pressure on RBA for Further Rate Hike

What happened

Reserve Bank of Australia (RBA) Deputy Governor Andrew Hauser stated that Australia's inflation outlook is worse than previously forecast. In what were considered 'hawkish' remarks, Hauser emphasized that inflation has remained high for a very long time and that the RBA cannot allow inflation expectations to drift away from its target. He mentioned that businesses report cost pressures as their number one problem. While acknowledging some slowing in labor market and housing data, indicating that monetary policy is working, he nonetheless stressed the deterioration of the inflation outlook. RBA staff forecasts are still being finalized, and Hauser refrained from preempting the Board's decision, which will meet on November 2 and 3. The next monetary policy decision is scheduled for November 3, and will be preceded by the release of third-quarter Consumer Price Index (CPI) data on October 28. The RBA raised its cash rate by 25 basis points to 4.60% on September 29, the fourth hike in 2026.

Why it matters

Hauser's comments are significant because they signal a more hawkish stance from the RBA regarding inflation, less than two weeks before the next monetary policy meeting. The concern about inflation expectations becoming unanchored suggests that the central bank is vigilant against the possibility of price pressures becoming more persistent. The deteriorating inflation outlook, even with signs of slowdown in other areas of the economy, strengthens the argument for a potential additional interest rate hike. The release of third-quarter CPI on October 28 becomes a crucial event, as an upside surprise could solidify the case for a fifth rate hike this year.

Market impact

• Interest rates and bonds: Increases the probability of a rate hike on November 3. This tends to push short-dated Australian bond yields higher as markets price in this expectation.
• Dollar and exchange rates: The Australian dollar (AUD) tends to strengthen against other currencies, driven by the prospect of higher interest rates, which makes Australian assets more attractive to foreign investors.
• Equities: Australian equities may face downward pressure, especially those in interest-rate-sensitive sectors such as technology and real estate, due to increased cost of capital and potential economic slowdown caused by higher rates.
• Commodities: The direct impact on commodities is less clear, but a stronger AUD can make Australian-exported commodities more expensive for foreign buyers, although global demand remains the primary driver.
• Brazil: Indirectly, a scenario of higher interest rates in developed economies, such as Australia, can contribute to a global risk-off environment, potentially leading to capital outflow from emerging markets and exerting depreciation pressure on the real, in addition to negatively impacting the Ibovespa.

What to watch

The main event to watch is the release of Australia's third-quarter Consumer Price Index (CPI) data on October 28. An upside surprise would strengthen the case for a rate hike. Additionally, the RBA's new economic projections, to be presented at the November meeting, will provide further clarity on the central bank's inflation outlook.

Scenarios

Base Case: Third-quarter CPI comes in higher than expected, leading the RBA to raise the cash rate by 25 basis points on November 3, with the AUD strengthening and Australian bond yields rising. Risk Scenario: Third-quarter CPI surprises to the downside or shows a more significant slowdown, leading the RBA to keep the cash rate unchanged, which could weaken the AUD and ease pressure on bond yields.

Original source: ForexLive (InvestingLive). For information only, not investment advice.