Australia's inflation outlook is "materially worse" than the central bank expected just two months ago, Reserve Bank of Australia Deputy Governor Andrew Hauser warned on October 21, 2026 — reigniting expectations that the RBA could raise interest rates again at its November meeting. Speaking at the Citi Australia & New Zealand Investment Conference in Sydney, Hauser delivered the bluntest assessment yet from within the central bank that the fight against inflation is far from over.
"The inflation outlook looks materially worse than we expected in the August report," Hauser said, according to the Wall Street Journal and Dow Jones Newswires. The third-quarter inflation data, released on 28 October, confirmed that view — setting up a genuinely uncertain rate decision on November 3.
The numbers behind the warning
In the 12 months to September, headline consumer price inflation rose to 4.3%, up from 4.0% in August — materially above the RBA's 2% to 3% target band. The quarterly trimmed mean measure of underlying inflation, which strips out volatile items, rose 1.0% over the September quarter and 3.7% over the year, above the RBA's 0.8% forecast for the quarter. The monthly trimmed mean was 3.6% over the year to September, up from a revised 3.5% in August — suggesting price pressures are broad and persistent rather than driven by one-off spikes.
Meanwhile, the labour market is finally cooling. Unemployment rose to 4.7% in September, up from 4.6% the month before, marking the third consecutive monthly increase and the highest reading in five years. Hauser acknowledged the softening was slightly faster than the RBA had projected, but described the job market as only "a little weaker" — and noted Australia's jobless rate remains near the bottom of G20 nations.
The RBA has already raised interest rates four times this year, lifting the policy rate to 4.6% to curb inflation. Yet underlying inflation has refused to budge from 3.6% for three straight months, and upside risks remain.
Why inflation is proving so stubborn
Hauser pointed to several forces the RBA had not fully anticipated. Oil prices are running roughly one-third higher than the central bank assumed just two months ago, amplified by escalating geopolitical tensions across the Middle East — a shock feeding directly into domestic input costs across manufacturing, logistics, and construction.
More unusually, Hauser flagged the artificial intelligence infrastructure boom as an emerging inflation driver. 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 captured in its mid-year modelling.
Perhaps most concerning for the board is what the RBA's own business liaison program is revealing: a growing share of Australian businesses now view inflation settling in the 3.0% to 3.5% range as the new normal — meaningfully above the 2% to 3% target. Hauser described this shift in expectations as "the central banker's nightmare," signalling that the credibility of the inflation target itself is at stake if the board does not act. When businesses expect higher inflation, they raise prices preemptively — which makes the expectation self-fulfilling.
The rate-hike debate
Financial markets reacted swiftly to Hauser's remarks. The probability of a November cash rate increase jumped from under 20% to 42%, according to market pricing data cited in coverage of the speech. The Commonwealth Bank of Australia and ANZ both acknowledged that Hauser had shifted the rate debate back into a genuine coin toss, with the outcome potentially swinging on the third-quarter CPI data due on Wednesday, October 28.
Some market participants had been cooling on the prospect of further hikes, betting that the rising unemployment rate would stay the RBA's hand. Hauser's message pushed back on that logic: inflation, not jobs, will be the primary factor in the decision. "Even though the unemployment rate has increased slightly to 4.7%, inflation will be the primary factor that the RBA will be looking at," noted Russel Chesler of VanEck, in comments reported alongside the speech.
The deputy governor also indicated that unemployment may need to drift further toward the 5.0% threshold to sufficiently absorb excess domestic demand and ease capacity bottlenecks — an unusually frank admission that the central bank sees further labour-market pain as the price of restoring price stability.
The tricky balance
Hauser was careful to note that monetary policy is working in some respects: "the labor market is easing, consumption growth is quite tepid, but there are pockets of growth," he said. Demand growth is cooling under the weight of higher rates and fuel costs. But the deterioration in the inflation outlook against that cooling demand is, in his words, "a pretty tricky balance."
The RBA board will publish its updated economic projections alongside the November 3 rate decision. If the Q3 CPI print comes in hot, a fifth rate hike this year becomes the base case. If it surprises to the downside, the board may hold — but Hauser's language suggests the bar for a hold has risen.
What the November decision hinges on
Everything now runs through the third-quarter CPI print due on October 28. A hot reading would confirm Hauser's warning and make a fifth 2026 hike the market's base case; a soft one would give the board cover to hold and wait. The Commonwealth Bank and ANZ both framed it as a coin toss — an unusual degree of uncertainty this close to a decision.
The RBA's dilemma illustrates a broader global pattern. Central banks from the Bank of England to the US Federal Reserve have discovered that the last mile of disinflation is the hardest: headline rates fall as energy shocks fade, but underlying services inflation — wages, rents, insurance — proves sticky. Australia's version has a local twist in the AI infrastructure boom, a genuinely novel driver that no central bank's models were built to capture.
There is also a credibility clock ticking. Hauser's "central banker's nightmare" remark — businesses treating 3.0-3.5% inflation as the new normal — was a deliberate signal. Once expectations detach from the target, re-anchoring them typically requires exactly the kind of painful medicine markets are now pricing: higher rates, slower growth, and rising unemployment. The board's November statement will be read as much for its language about expectations as for the rate decision itself.
Why it matters
For Australian households, the stakes are immediate: another rate rise would push mortgage costs higher just as the economy cools, squeezing borrowers who have already absorbed four hikes this year. For businesses, it means tighter financial conditions and a central bank openly worried that inflation expectations are slipping their anchor.
The episode is also a case study in how quickly inflation dynamics can shift. Two months ago, the RBA's August forecasts assumed a smoother glide path. A Middle East energy shock, an AI building boom, and unmoored business expectations have redrawn that path — and left Australia's central bankers contemplating a move they had hoped to avoid. Related reading: France's bond yields topping 5% for the first time since 2002, Gulf stocks falling on Houthi threats and the IMF warning, and Trump's $8 billion harvest fuel relief plan.
The rate outlook is already feeding through to property: Australian house prices have suffered their steepest quarterly fall on record.
Australia is not alone in facing renewed hikes: the Bank of Canada is expected to raise interest rates to 2.50% on October 28.