Australian central banker says policy working, but inflation outlook worse

SYDNEY: A top Australian central banker on Wednesday said tighter monetary policy was working to slow the economy but the inflation outlook had still worsened, leaving him unsure whether interest rates would need to rise further.

Speaking at a Citi conference, Reserve Bank of Australia Deputy Governor Andrew Hauser said the bank’s economists were still finalising their forecasts but the inflation outlook did look “materially worse”, in part due to high oil prices.

Hauser said monetary policy could not deal with an oil shock directly, but it did need to make sure that higher costs did not feed through to rising inflation expectations.

The central bank meets on November 3 to decide whether to raise its 4.60 percent cash rate for a fifth time this year as it struggles to bring stubborn inflation under control. Markets now imply around a 40 percent chance rates will rise to 4.85 percent next month, up from 30 percent at the start of the week. Investors are fully priced for a move by March.

Consumer price data due next week could show headline inflation climbing to 4.0 percent in the third quarter as the Gulf war stokes fuel costs. Crucially, core inflation is seen holding around 3.5 percent and uncomfortably far above the RBA’s long-term target band of 2 percent to 3 percent.

Hauser said it was “pretty clear” that the inflation outcome would likely be higher than the RBA had forecast. “Yes, we will study it carefully when we get the final number,” he added. “And at the moment, certainly those numbers are causing us to ask whether there’s less capacity in the economy than we previously thought.”

Minutes of the RBA’s last meeting showed the board was still concerned inflation risks lay to the upside, even after lifting rates for a fourth time this year.

Since then, labour data have shown unemployment unexpectedly hit a five-year peak of 4.7 percent in September, while house prices have fallen faster than policymakers foresaw.

Hauser noted the labour market had eased more than expected, and there had been some softening in household demand and the housing market.