The RBA says Australia’s inflation outlook is materially worse, reviving bets on a November rise

The Reserve Bank of Australia said the country’s inflation outlook has become materially worse¹. Deputy Governor Hauser gave the warning ahead of the central bank’s November meeting^2,5.

His comments raised the prospect of another interest rate rise as soon as November². He described the November rate decision as open⁵.

Bond traders had earlier cooled on the prospect of a further rise in interest rates at the policy meeting next month¹. The warning challenged that view^1,2.

Why it matters to investors

The currency moved first. The Australian dollar was buoyed by the hawkish tone from the central bank, while the US dollar was on the back foot as US yields and crude prices dipped⁴.

For bond investors, the change matters because pricing had moved toward no further increase¹. A central bank that calls its own inflation outlook materially worse is signalling that it may need to act again^1,2.

The bank’s position is difficult. It has been described as a nightmare position, with the bank considering another rate rise in November³. One assessment in coverage of the speech said the bank seems increasingly prepared to risk a recession².

Hauser, who previously worked at the Bank of England, said local businesses had their role to play³. That remark places part of the burden of controlling inflation on how companies set prices and wages, not only on the central bank’s rate decisions³.

Australia is not alone in facing that choice. The Reserve Bank of New Zealand and the Bank of Canada decide policy on the same day as the Federal Reserve, and traders are betting on quarter-point rises by both⁴. A move by the Reserve Bank of Australia in November would add to a wider shift toward tighter policy among central banks^2,4.

What to watch

The main event is the November policy meeting, which the deputy governor has described as open^2,5. Investors will look for whether other board members repeat the view that the outlook is materially worse¹.

Bond pricing is the second signal. Traders had moved away from expecting a rise¹, and any further shift back toward a hike will show how seriously markets take the warning⁵.

The third is the currency. The Australian dollar has already responded to the hawkish message⁴, and its path will reflect how the bank’s decision compares with those of its peers in New Zealand and Canada⁴.

Finally, the warning about risking a recession² will put attention on growth data and on whether businesses take up the role that the deputy governor says they have to play³.