RBA flags worsening inflation outlook

Reserve Bank of Australia deputy governor Andrew Hauser has warned that the country’s inflation outlook now looks “materially worse” than the central bank anticipated two months earlier. The remarks were made at a Citi investment conference in Sydney and relate to projections last updated in August. Hauser’s comments signal increased concern within the central bank about the persistence of price pressures in the economy.

Hauser said the basic issue is that inflation has been high for a long time, and that some people in the community are starting to doubt whether it will be brought back to the 2.5% target in a reasonable timeframe. He indicated that this erosion in confidence is an important factor for monetary policy, because expectations can shape future price and wage behaviour.

Hauser reported that liaison with businesses and survey data show an increasing share of firms are passing higher input costs on to customers. He noted that some businesses are beginning to treat inflation in the 3.0%–3.5% range as the “new normal.” He described such a shift in mindset as a “central banker’s nightmare,” underscoring the risk that elevated inflation could become entrenched.

These developments raise concerns that inflation expectations could drift away from the Reserve Bank’s target. Hauser warned that if this process continues, it may require higher interest rates than otherwise to re‑anchor expectations. He framed the task as balancing a slowing economy with the need to maintain confidence that inflation will return to target.

Alongside inflation risks, Hauser pointed to signs that monetary policy is already weighing on activity. He said the labour market has eased more than expected, with unemployment at about 4.7% in September. This indicates some loosening from earlier, tighter conditions.

Hauser also cited softening household demand and a weaker housing market as evidence that higher interest rates are slowing the economy. These trends suggest that demand‑side pressures on inflation are moderating even as concerns about inflation expectations and cost shocks intensify.

Hauser highlighted that monetary policy cannot directly offset an oil price shock, but it can act to prevent higher energy costs from feeding into broader inflation expectations. Reports around his remarks noted that Brent crude prices were roughly one‑third higher than the Reserve Bank had assumed in August, adding to the challenge of managing inflation. This complicates the policy trade‑off between supporting growth and controlling prices.

The deputy governor said Reserve Bank economists were finalising updated forecasts and that upcoming quarterly inflation data would be important for the outlook. His comments came shortly before the Reserve Bank board’s early‑November meeting, sometimes referred to as the Melbourne Cup day meeting. Financial markets have been watching such signals closely as they assess the likelihood of further interest rate increases.