Flagging a higher-than-expected trimmed mean a week before the official CPI release is an unusually direct steer, and it shifts the risk balance for 28 October toward an upside surprise. Combined with his view that capacity pressures are tighter than the RBA assumed, the remarks are likely to reinforce hike pricing for 3 November, which would tend to support the Australian dollar and lift short-end Australian yields. His comment on supply shocks matters for the oil channel: it suggests the RBA is less inclined to look through energy-driven price rises while expectations are at risk, making crude a more direct input into Australian rate pricing. Softer labour data gives the doves a counterweight, but Hauser’s framing suggests it is not enough on its own to keep the Board on hold.
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Hauser has all but previewed a hot underlying inflation print, and with capacity tighter than assumed and supply shocks no longer something to look through, a softer jobs market looks like a footnote rather than a reprieve.
Summary:
- Hauser said the quarterly trimmed mean inflation measure looks like it will be higher than the RBA expected
- He said capacity pressures in the economy are more elevated than anticipated
- The RBA has to respond to supply shocks to keep inflation expectations anchored, he said
- Policy cannot target current inflation, but that does not mean current inflation is unimportant
- September labour data was a little weaker than expected; unemployment remains quite low but the labour market is easing
- September-quarter CPI is due on 28 October, ahead of the RBA’s 3 November decision
More from Reserve Bank of Australia Deputy Governor Andrew Hauser, who signalled that underlying inflation for the September quarter is likely to come in above the central bank’s expectations, adding to his earlier comments that the inflation outlook looks worse than forecast.
Speaking at Citi’s Australia and New Zealand Investment Conference in Sydney, Hauser said the quarterly trimmed mean appeared set to be higher than the RBA had expected. The trimmed mean strips out the largest price rises and falls each quarter to give a clearer read on underlying inflation, and it is the measure the RBA watches most closely. His remark comes a week before the Australian Bureau of Statistics publishes September-quarter inflation data on 28 October.
Hauser also said capacity pressures in the economy were more elevated than the RBA had anticipated, suggesting demand is still running further ahead of supply than policymakers assumed.
On supply shocks, Hauser said the RBA has to respond to them in order to keep inflation expectations anchored. Central banks often look through supply-driven price rises on the basis that they fade over time, but his comments suggest the RBA sees less room to do so after a long period of high inflation. The RBA has previously pointed to the Middle East conflict and its effect on oil prices as a supply-side pressure.
He added that monetary policy cannot target current inflation, since it works with a lag, but stressed that this does not mean current inflation is irrelevant, as persistent price rises can feed into expectations.
The labour market offered a partial offset. Hauser said September’s employment report was clearly a little weaker than expected and that while unemployment remains quite low, conditions are easing.
The RBA lifted its cash rate to 4.60% on 29 September. The Board meets on 2 and 3 November, with the decision due at 2.30pm Sydney time on 3 November (03:30 GMT, 22:30 ET on 2 November), alongside updated staff forecasts. A trimmed mean result above expectations next week would likely leave a further rate rise firmly on the table.
This article was written by Eamonn Sheridan at investinglive.com.