RBA deputy governor Andrew Hauser has warned that the inflation outlook had become materially worse since the central bank's August projections, The Guardian reported, and flagged hard choices ahead for the rate-setting board. Hauser spoke at a conference in Sydney.
The RBA has raised the cash rate four times across six meetings during the current cycle, lifting it by a total of 100 basis points, from 3.60% to 4.60%. The September rate decision brought the cash rate to its highest level in 15 years. Market pricing for a rate rise at the next board meeting, scheduled for 3 November, stood at 27% according to one source and moved from 30% before Hauser's remarks to 45% afterwards according to another.
Oil prices were approximately one third higher than the RBA had assumed in its August projections. Unleaded fuel prices have risen around 39% since July, while diesel prices have risen more than 45%.
The RBA had forecast headline inflation of around 3.9% in August; it came in at 4.0%. The August consumer price index result was released one day after the RBA's September board meeting.
Hauser said the board faced a dilemma between doing more to tackle high inflation, which would mean weaker activity and a softer labour market, or holding back to protect employment while risking inflation expectations becoming entrenched. He said short-term additional pain was preferable to a longer and potentially much worse outcome if inflation expectations became locked in. The RBA's business liaison and surveys pointed to businesses increasingly treating inflation of around 3 to 3.5% as a likely new normal, he said.
Hauser said that if offshore supply shocks fed into second-round inflation effects and lifted inflation expectations, that would compound an already difficult situation. He indicated the RBA could not allow inflation expectations to shift away from its target and that the central bank was compelled to react where shocks were large, persistent or where inflation expectations were under challenge. He said that when the economy is balanced and inflation expectations are anchored, a central bank can look through a temporary price shock without a monetary policy response, but that those conditions did not currently apply.
AMP deputy chief economist Diana Mousina said a November hike remained difficult to justify given fresh evidence of labour market weakness and the board having already moved in response to price pressures. Updated forecasts on inflation and unemployment are to be released alongside the 3 November policy decision. Hauser said the RBA was still finalising its forecasts, with roughly a week and a half remaining before the policy meeting.
Renters face the steepest pressure, with Hauser putting the share in negative cash flow at up to 15%, against just 2% of mortgage holders according to RBA modelling. He said that those renting or on low incomes bore the greatest burden from higher inflation, not mortgage holders.
If the RBA raises the cash rate at its November meeting, the monthly repayment on an average new mortgage of $731,000 would rise by $122. A further rise would make the cash rate an 18-year high.
Reporting: The Guardian, The Nightly, ABC News, Yahoo Finance
Written by Pick & Scroll News from the reporting and documents linked above.
