Brent tops $110, complicating Australian rate decision as inflation outlook worsens
Key Facts
Brent crude topped $110 a barrel in trading on October 21 as Reserve Bank of Australia Deputy Governor Andrew Hauser warned that the inflation outlook had deteriorated partly because of higher oil prices, according to Reuters. The agency compared that price with $102 a barrel at the bank's previous meeting, presenting monetary policymakers with a further increase in energy costs. Hauser described the inflation outlook as "materially worse" as the bank finalised its quarterly forecasts. But he remained uncertain whether a rate hike would be needed in November amid a slowing economy. He said monetary policy was already slowing activity, setting the decision on further tightening against the need to protect the labour market.
Brent was more than 35% above the level assumed by the Reserve Bank of Australia in its August forecasts, according to Reuters. The Saudi Press Agency said in a report published on October 21 that the front-month Brent contract reached $111.99 during the October 20 session, its highest level in 5 months. The central bank explains in its May Statement on Monetary Policy that higher fuel prices also affect inflation indirectly over time through rising input costs. On supplies, the Australian government says fuel shipments continue to arrive in the required volumes and at the required pace despite disruptions in the global market. Alongside energy risks, Hauser warned, according to Investing.com, that businesses had begun to view inflation of 3.5% as "the new normal", with price increases becoming more entrenched.
The warnings follow an acceleration in Australia's annual headline inflation to 4.0% in August from 3.5% in July, according to the Australian Bureau of Statistics. Annual trimmed mean inflation, meanwhile, remained at 3.6% in both months. On a monthly basis, the consumer price index rose 0.4% in August before seasonal adjustment. The monthly increase was slightly below the market consensus forecast of 0.5% for that month, according to the Western Australian Treasury Corporation. The annual reading also fell short of the consensus forecast of 4.1% for August, despite rising from July.
The Monetary Policy Board raised the cash rate target by 25 basis points to 4.60% at its September meeting, according to the central bank's minutes. The board made that decision unanimously. But September labour market data showed seasonally adjusted employment fell by 39,300 people, a decline of 0.3%, according to the Australian Bureau of Statistics. The seasonally adjusted unemployment rate rose by 0.1 percentage point to 4.7%. Outlining the trade-off facing the bank, Hauser set out the choice between further tightening to tackle inflation and "holding back to protect the labour market", according to Reuters.
In markets, Reuters reported on October 21 that traders were pricing in a roughly 40% chance of an Australian rate hike in November. That probability was around 30% at the start of the week. The rate hike scenario priced by markets would take the rate to 4.85%. Alongside Hauser's remarks, the Australian dollar rose 0.1% to US$0.7013, according to the agency. That brought the currency close to the previous session's high of US$0.7017.
The next inflation release is due on October 28, 2026, when the Australian Bureau of Statistics publishes the consumer price index. The forthcoming release covers September prices. The bureau set the publication time at 11:30 a.m. Australian Eastern Daylight Time. Following the index release, the next interest rate decision is due on November 3, 2026, according to the Reserve Bank of Australia's published schedule. The monetary policy update is scheduled to be announced at 2:30 p.m.