The Deputy Chairman of the Reserve Bank of Australia warned that the inflation outlook “deteriorated significantly” and the probability of interest rate hikes in November rose to 43%

The Zhitong Finance App learned that Australian Federal Reserve Vice Chairman Andrew Hauser said on Wednesday that Australia's inflation outlook looks “significantly worse” than the Reserve Bank of Australia's August forecast, and that rising oil prices and continuing domestic pressure are the main reasons.

When asked about the prospects of the RBA's interest rate hike at the early November policy meeting during a fireside conversation on Wednesday, Hauser said, “We see that higher AI prices and technology prices are being transmitted to the Consumer Price Index (CPI).” He also said that Australia is experiencing a boom in data center construction, which will also drive up inflation. In addition, there is pressure on domestic production capacity.

Hauser added that oil prices are currently about one-third higher than the level predicted by the Reserve Bank of Australia in August, and fiscal intervention measures have less of a buffering effect on Australian consumers.

According to swap data, traders are currently pricing that the possibility that the Reserve Bank of Australia will raise interest rates at the November 3 meeting is about 43%, up from about 30% before Hauser's speech. The data also shows that the market will almost completely raise interest rates by 25 basis points in February next year. This point in time is ahead of the market's previous expectations for May next year.

The Australian dollar remained above 70 cents against the US dollar, and the yield on policy-sensitive Australian three-year treasury bonds rose slightly.

Sean Carlow, senior analyst at ITC Markets in Sydney, said, “Hauser seemed very uneasy about the inflation situation in the third quarter. He may once again play the role of a 'bad cop, 'warning that another rate hike is imminent.”

Hauser's remarks are less than two weeks away from the Reserve Bank of Australia's policy meeting. The purpose of this meeting was to assess whether the economy is gradually returning to balance, or whether further interest rate increases are needed to curb inflation. The key to the assessment is third-quarter inflation data to be released next Wednesday. Market forecasting data will show that consumer prices will not quickly return to the RBA's 2%-3% inflation target range.

Hauser also warned of the risk of high inflation embedded in expectations. He said, “The basic truth is that inflation has been high for a long time, and we are beginning to see signs that some people in society are unsure whether we can actually reduce the inflation rate to the target level, or at least not achieve it for a long time.” He added that more and more companies see 3% to 3.5% inflation as a “new normal,” and called it a “central bank nightmare.”

The Reserve Bank of Australia raised interest rates at the end of September, raising interest rates to 4.6%, the highest level in 15 years, in an attempt to curb the accelerated rise in prices. RBA Chairman Michelle Bullock's speech after the rate hike was interpreted as slightly dovish, in contrast to the bank's previous hawkish policy statements and meeting minutes.

Since then, rising unemployment has prompted traders to cut expectations for interest rate hikes. Hauser also acknowledged the latest signs of weakness in the labor market on Wednesday. Earlier this week, RBA Assistant Governor Christopher Kent said earlier this week that the labor market is softening faster than expected.

“We clearly have a dual mission,” Hauser said, pointing out the need to choose between protecting the labor market and taking the risk of high inflation. “These are tough choices. As central banks, we don't want to be in this situation. But I think this is the situation we're going to face at the next meeting.”