‘Materially worse’ inflation outlook sends November rate hike odds surging

The odds of another interest rate hike have surged, threatening to plunge Australian mortgage holders into an even tighter financial chokehold ahead of Christmas.

Markets acted quickly after RBA deputy governor Andrew Hauser warned inflation is proving harder to bring under control, sending the chances of a November 3 rate hike soaring from 27 per cent to 41 per cent.

“The inflation outlook looks materially worse than we projected in the August report,” he told the Citi Investment Conference on Wednesday, according to the Australian Financial Review.

Should it come to fruition, another rate hike would mark the fifth increase this year, pushing the cash rate to its highest level since 2008.

The fresh warning has already trickled into economic forecasts for homeowners, with Morgan Stanley analysts predicting Australian property prices could fall by as much as 15 per cent by the end of next year.

National home values have already fallen 5.2 per cent since their March peak, and Morgan Stanley now expects a 10 to 15 per cent fall, the Australian Financial Review reports, which would mark the largest decline in 40 years.

Analysts said further rate rises would push prices towards the upper end of that range.

Global and domestic pressures continue to drive prices up.

Oil prices are roughly a third higher than the RBA previously assumed, while the war in Iran, the artificial intelligence boom, and sustained demand are adding to cost pressures.

However, the RBA's decision is complicated by signs that Australian households are pulling back on spending and the labor market is cooling.

“Monetary policy is working,” Hauser said.

“[The] labour market is easing, consumption growth is quite tepid, but there are still pockets of growth, and the inflation outlook has deteriorated. So that’s a pretty tricky balance.”

Unemployment unexpectedly held at a five-year high of 4.7 per cent in the latest figures, which Hauser acknowledged was weaker than expected.

“It clearly was a little weaker than we and others had been expecting,” he said.

However, Hauser said Australia’s unemployment rate remained near the bottom of the G20 and low by historical standards.

“No lost job is one to celebrate. I would never say that, but these are still quite low numbers internationally and relative to history,” he said.

The RBA must now weigh the risk of allowing inflation to remain high against the damage another rate rise could inflict on employment and economic growth.

“The challenge that’s facing the board and has done for some time is do you do more to tackle higher inflation, recognising that that means weaker activity, weaker labour market,” Hauser said.

“Do you have a dual mandate, or do we hold our horses to protect the labour market, try and protect some of the labour market … but accept the risk in so doing is that this upside inflation risk embeds, and that becomes more expensive to deal with?

“Those are hard choices; they’re not where we’d like to be ideally as the central bank.”

Australians are in for a long wait before inflation falls back into the central bank’s target zone.

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Bad news for Aussies as financial pain tipped to linger for years

It’s not expected to return to the middle of the bank’s 2 to 3 per cent target until March 2028.

The International Monetary Fund has projected Australia’s inflation rate at 3.9 per cent in 2026, the fifth-highest among advanced economies behind Iceland, Israel, Greece and New Zealand.