RBA deputy governor says policy is working, but the inflation outlook has worsened

what happened

Reserve Bank of Australia deputy governor Andrew Hauser said on Wednesday, speaking at a Citi conference, that tighter monetary policy is doing its job of cooling the economy. He warned, however, that the inflation picture has deteriorated materially, partly because of elevated oil prices.

Hauser said policy cannot offset an oil shock directly, but it must prevent higher costs from spreading into longer-run inflation expectations. He added that the bank's economists are still refining their forecasts, and he is unsure whether rates will need to climb again.

Markets put roughly a 40% chance on a move to 4.85% at the November 3 meeting, compared with 30% at the beginning of the week, and see a hike fully priced by March. Consumer price data due next week may show headline inflation rising to 4.0% in the third quarter, with core inflation near 3.5%, well above the 2% to 3% target band. Unemployment unexpectedly reached a five-year high of 4.7% in September, while house prices have dropped faster than officials anticipated.

why it matters

For the Australian dollar and bonds, the key events are the November 3 decision and the upcoming inflation release. A firmer rate path typically supports the currency and yields, while a cooling labour market and housing sector push in the opposite direction.

market impact

AUD/USD and Australian bonds: expectations of higher RBA rates support yields and the currency

tags

instruments