Reserve Bank of Australia deputy governor Andrew Hauser has flagged higher inflation as consumer inflation expectations surge.
Reserve Bank of Australia deputy governor Hauser has warned that inflation is set to run hotter than the central bank’s own forecasts as inflation expectations soar to historic highs.
Speaking on The Conversation’s Politics with Michelle Grattan podcast, Hauser said the jump in global oil prices following the escalating conflict in the Middle East would lift inflation above the 4.2 per cent forecast the RBA projected in February.
He said inflation remained “well above target”, with the latest figures showing headline inflation at 3.8 per cent in January and underlying inflation at 3.4 per cent over the year.
He emphasised that the Iran conflict and associated oil price rises represented a clear risk to the RBA’s February forecasts.
“It clearly is the case that it’s an upside risk to that projection in February (conflict in the Middle East). It’s still in flux,” Hauser said.
Hauser was then pressed on a recent analysis by National Australia Bank chief economist Sally Auld, who suggested inflation could reach 5 per cent by the middle of this year if oil reached US$100 a barrel.
“I know the 5 per cent number has grabbed headlines, but when I went and looked at her piece, it’s in fact very thoughtful,” he said.
While refusing to nominate a specific inflation figure, Hauser emphasised that the central bank’s internal view had shifted.
“I don’t want to give a number that might give a false sense of accuracy, but certainly directionally it’s higher (inflation) than the projection we published in February,” he said.
Hauser also noted that before the oil shock, inflation was expected to remain above the midpoint of the 2–3 per cent target band for years.
“But you know, we have a problem with inflation. It’s too high,” he said.
The deputy governor repeatedly stressed the danger of under‑reacting to the new shock.
He warned that keeping interest rates low in the face of persistent inflation could allow expectations to move away from the target.
“If we fail to act decisively enough to prevent inflation staying high or even rising and expectations of inflation disanchor as they have not today in a long-term sense. But if we do see that disanchoring, it will be bad for everyone,” he said.
“Failing to raise rates to the level they need to be and allowing inflation to get out of control is a clear problem.”
Majors see genuine tightening risk, as NAB and Westpac tip March hike
National Australia Bank (NAB) and Commonwealth Bank said they took Hauser’s remarks as a clear warning that the risk to rates was skewed to the upside.
In a significant revision to its outlook, NAB announced on Wednesday (11 February) that it had moved from expecting a single hike in May to predicting back‑to‑back increases over the next two meetings.
“We now expect the RBA to deliver a 25bp increase to the cash rate at the March meeting, followed by another increase in May, taking the cash rate to a peak of 4.35 per cent,” NAB said.
Prior to shifting its rate call, NAB said Hauser’s comments showed that the RBA maintained a strong “bias towards further tightening”.
“All up, we take Hauser’s comments as putting the market on notice that it should not be surprised if the RBA decides to raise rates next week,” NAB said.
Westpac also moved in lockstep with NAB, revising its call to a pair of 25-basis point hikes in March and May.
The bank previously expected a single hike in May, yet now believes the RBA will likely act at both of its next two meetings.
Both NAB and Westpac said recent messaging from the RBA’s leadership played a significant role in altering their rate predictions.
CBA also described Hauser’s comments as striking a “hawkish” tone.
“He ran through the recent run of strong data, and highlighted the risks to inflation from the Iran War, but also flagged that the Bank won’t have an updated set of forecasts until May and that uncertainty was elevated,” CBA said.
CBA noted that financial markets now put the probability of a March hike at around 60 per cent and said the meeting would be “live”.
However, CBA and Australia and New Zealand Banking Group (ANZ) both still view May as the more likely timing for a potential hike.
Bank of America the first to tip March rate rise
Meanwhile, Bank of America was the first bank to break from the broader market consensus and on Tuesday predicted a 25-bp rate hike at the RBA’s 17 March meeting.
Nick Stenner, the bank’s head of Australia and New Zealand economics, told clients on Tuesday that the oil shock triggered by the Iran conflict represented a “material” upside risk to inflation.
He said that with inflation high and the labour market tight, prolonging further tightening risked undermining the RBA’s integrity.
“Given above-target inflation and a tight labour market, we see no compelling reason to delay the inevitable,” Stenner said.
In his view, a March hike would send a strong signal that the central bank was prepared to act pre‑emptively in the face of renewed price pressures.
Expectations surge as confidence sinks
The shifting rate debate is playing out against a backdrop of rising inflation expectations and weakening consumer sentiment.
Weekly consumer inflation expectations jumped to 6.1 per cent, reaching their steepest point since November 2022 and marking the largest weekly increase since the ANZ‑Roy Morgan survey began tracking the series in 2010.
At the same time, consumer confidence fell 3.7 points to 73.4 points, its lowest reading since July 2023.
ANZ economist Madeline Dunk said the sharp move in expectations reflected both renewed geopolitical tensions and the direct hit from higher fuel costs.
“This takes inflation expectations to their highest level since November 2022,” Dunk said and added that the war‑driven oil spike had “played a role in the higher inflation expectations.
[Related: NAB and Westpac tip back to back rate hikes]
