The RBA’s inflation warning has put another rate hike in the firing line, throwing property deals into disarray and forcing agents to reset vendor expectations as buyers face shrinking borrowing power.
A fifth rate hike has never looked closer, with Reserve Bank of Australia deputy governor Andrew Hauser warning of a “central banker’s nightmare” as inflation threatens to remain above target for years.
Speaking at the Citi Investment Conference in Sydney, Hauser said the inflation outlook was “materially worse” than the Reserve Bank had forecast in August, with three key risks intensifying ahead of the November board meeting.
With the next interest rate decision less than a fortnight away, Hauser said the board faced “hard choices” as it weighed further tightening against the risk of weakening economic growth and employment.
Hauser warned that inflation expectations were beginning to shift, with a growing share of businesses viewing inflation of between 3 and 3.5 per cent as the new normal, above the RBA’s 2 to 3 per cent target.
“Look, that is the central banker’s nightmare. We can’t allow expectations to shift away from the target,” he said.
A November hike would mark the RBA’s fifth rate rise this year, following increases in February, March, May and September, with the board holding in June and August to assess the impact of its earlier decisions.
Hauser said the same pressures identified at the September meeting were now worsening, with higher oil prices, rising technology costs and persistent domestic capacity constraints threatening to keep inflation elevated.
He said that oil prices were about a third higher than the RBA had assumed in its August forecasts, reflecting the ongoing Middle East crisis and higher refining costs.
The AI and technology boom was also adding to inflation, with Hauser noting that rising prices were feeding into consumer price index figures and that a surge in data centre construction was supporting demand.
Meanwhile, he said inflation had remained at or above expectations despite signs of a cooling labour market.
Additionally, Hauser said prices were rising fastest in areas most exposed to capacity pressures, including market services.
The deteriorating inflation outlook comes as the broader economy shows signs of slowing, with Hauser pointing to weaker-than-expected labour market data, subdued consumption, falling household confidence and a housing market undergoing a “major correction”.
However, he said stronger overseas demand, particularly in Asia, and significant business investment in data centres were providing some support.
“Monetary policy is working. Labour market is easing. Consumption growth is quite tepid. But there are still pockets of growth and the inflation outlook has deteriorated.”
Hauser said the board would need to decide whether to raise rates further to tackle inflation, knowing it could weaken economic activity and employment, or hold rates steady to protect the labour market while risking more persistent inflation.
While the competing pressures leave the door open to further tightening, Hauser said the RBA was still finalising its forecasts ahead of the next meeting.
While Hauser’s comments have heightened the risk of another rate rise, the major banks remain divided on the November decision.
ANZ is forecasting a 0.25 percentage point increase to 4.85 per cent, while Westpac sees the risk leaning towards a November hike.
Commonwealth Bank is maintaining its central forecast of rates remaining on hold, despite acknowledging the rising risk of further tightening, while NAB expects the cash rate to stay at 4.60 per cent.
Property market impact
A fifth rate hike would take the cash rate to 4.85 per cent, a level not seen since late 2008, putting further pressure on borrowing capacity and property market activity.
PRD chief economist Dr Diaswati Mardiasmo said higher borrowing costs could slow buyer demand, moderate price growth and reduce transaction activity, making it critical for agents to back their pricing advice with local market evidence.
“Agents will need to adopt more data-driven pricing strategies, provide vendors with regular feedback on market conditions, and manage price expectations using current sales evidence, listing stock levels, and buyer enquiry trends,” Mardiasmo told REB.
She said agents should also keep up with the latest vendor discount trends for houses and units in their specific suburb to manage sellers’ expectations.
“Agents must obtain the latest average vendor discount trend for both houses and units that are highly specific to their local postcode area, to provide hard evidence on where pricing is currently sitting,” she said.
While presenting vendors with evidence that their property may need to be priced lower could be a difficult conversation, Mardiasmo said it could help agents build trust and avoid extended selling periods and repeated price reductions.
She said negotiations could also become more challenging as buyers sought greater flexibility on prices, finance conditions and settlement terms.
She said the market ahead will require agents to further manage competing expectations and keep transactions on track.
“Negotiations are likely to become more complex, with buyers seeking greater flexibility on price, finance conditions and settlement terms, requiring agents to focus on maintaining deal momentum and bridging expectation gaps between buyers and sellers,” Mardiasmo said.
Additionally. Mardiasmo said agents would need to tailor their advice to individual clients rather than rely solely on broad market commentary, taking into account their financial circumstances, local conditions and property needs.
“The market may be moving a certain way, but what is reported will most likely never be about their specific location, housing needs and financial conditions.”
“Cutting through the noise by focusing on the person as an individual is crucial in a higher interest rate environment,” she said.
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