Australia’s central bank has reignited debate over a fifth interest rate increase this year after Deputy Governor Andrew Hauser warned that inflation pressures have intensified well beyond the RBA’s August projections.
Financial markets moved swiftly following Hauser’s remarks at the Citi Australia and New Zealand Investment Conference in Sydney. Overnight indexed swap markets repriced the probability of a 25-basis-point hike at the November 3 meeting from ~20 to 27 percent before his speech to as high as 41 to 55 percent in the aftermath. A full 25-basis-point increase is now priced in by March 2027, which would take the official cash rate to 4.85 percent, a level not seen since 2008.
The Australian dollar was among the clearest beneficiaries of the hawkish pivot, with forex traders seeing the AUD/USD break back above the 0.70 resistance level, as yield differentials shifted back in the Aussie’s favour.
Goldman Sachs was among the most notable institutional movers, flipping its official call to project a 25-basis-point hike on November 3, having previously anticipated a hold. Commonwealth Bank of Australia and ANZ both acknowledged that Hauser had shifted the rate debate back into a genuine coin toss, with the outcome now potentially swinging on the Q3 Consumer Price Index data next week (Wednesday, October 28).
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What Has Changed in RBA Projections
The RBA’s August forecasts were built on a set of assumptions that have since shifted materially in the wrong direction for policymakers. Oil prices are now running approximately one-third higher than the central bank assumed just two months ago, amplified by escalating geopolitical tensions across the Middle East. That energy cost shock is feeding directly into domestic input costs across manufacturing, logistics, and construction.
A second and less conventional inflation driver has emerged through the artificial intelligence infrastructure boom. Hauser flagged that surging AI-related technology prices and a wave of domestic data centre construction are generating capacity pressures and lifting input costs across a broad range of industries, a dynamic the RBA had not fully anticipated in its mid-year modelling.
Perhaps most concerning for the board, however, is what the RBA’s own business liaison program is revealing about inflation expectations. A growing share of Australian businesses now view inflation settling in the 3.0 to 3.5 percent range as the new normal, meaningfully above the RBA’s 2 to 3 percent target band. Hauser described this shift in expectations as “the central banker’s nightmare,” signalling that the credibility of the inflation target itself is now at stake if the board does not act.
On the labour market front, Australia’s unemployment rate rose to 4.7 percent in September, its highest reading in five years, up from 4.6 percent the previous month. Hauser acknowledged the softening was slightly faster than the RBA had projected, but placed it in international context by noting Australia’s jobless rate remains near the bottom of G20 nations. The deputy governor indicated that unemployment may need to drift further toward the 5.0 percent threshold to sufficiently absorb excess domestic demand and ease capacity bottlenecks.
What To Watch
The November 3 meeting will carry additional weight because it will be accompanied by the RBA’s updated quarterly economic forecasts, including revised projections for where unemployment is expected to settle relative to the 5.0 percent level. Those forecasts will give markets a clearer read on how much further tightening the board believes may be required beyond November.
With the RBA’s November decision still very much open, the Q3 CPI report on October 28 has become the single most important data release in Australia’s near-term economic calendar. The trimmed mean inflation measure, the RBA’s preferred gauge of underlying price pressures, will carry the most weight.
A hotter-than-expected trimmed mean reading would likely push November hike probabilities higher still, and provide the board with the clearest possible justification for a fifth consecutive increase. A softer-than-expected read would give the RBA political and analytical cover to hold rates steady, at least temporarily, while retaining the option to move in early 2027 if conditions warrant.
The RBA’s November decision has moved from a near-certain hold into one where there the possibility of a rise has doubled on the day. With the current odds around 50%, this is one of the closest calls of the year, and one that could see rates rise to their highest level in 18 years.
