RBA's rate hike path caught in a dilemma! Job market cooling faster than expected, yet inflation pressure remains hard to dissipate.

RBA's rate hike path caught in a dilemma! Job market cooling faster than expected, yet inflation pressure remains hard to dissipate. Reserve Bank of Australia Assistant Governor Christopher Kent said Australia's labor market is showing signs of cooling faster than the central bank expected. This highlights the dilemma facing policymakers: trying to curb inflation while preserving the gains already made in the job market. "There are some indicators showing that the degree of tightness in the labor market is declining somewhat faster than we had previously forecast," Kent said on Monday. He added that an important question is whether this is due to weakening demand or rising labor costs. Data released last week showed Australia's September unemployment rate was higher than expected. Although this data prompted traders to reduce bets on further RBA rate hikes, Kent cautioned that it is equally important to watch the inflation data due this week. "Let's see how they view the inflation data. It is very important to analyze the information from both aspects together. We will do so when we update our forecasts," he said, referring to the economic outlook the RBA will publish at its next policy board meeting in November. RBA expects inflation to fall back to the midpoint of the target range by early 2028 Kent's remarks came after the RBA raised rates for the fourth time this year at the end of last month, lifting the cash rate to 4.6%, the highest level in 15 years, to curb persistently high inflation. After that decision, comments by RBA Governor Michele Bullock were interpreted as slightly dovish, in contrast to the earlier hawkish policy statement and September meeting minutes. Commonwealth Bank of Australia Chief Economist Luke Yeaman said the difference "reflects the RBA's gradual approach to policy and the bank's uncertainty about how the economy will respond to a fourth rate hike. It does not mean the central bank lacks determination to fight inflation." RBA Deputy Governor Andrew Hauser is also scheduled to speak this week, and his remarks will be closely scrutinized for clues on the future rate path. Investors and economists are also watching the quarterly inflation report due next week to assess whether the economy is gradually returning to balance or still needs further rate hikes. According to swap market data, traders currently expect the RBA to raise rates once more before May next year. However, the market sees about a one-in-four chance that the bank will hike at the conclusion of its November 2-3 policy meeting. Australia's inflation level remains far above the central bank's target In addition, Kent said the cash rate and the expected rate path over the next 18 months are both currently at the upper end of the RBA's estimated range for the neutral rate. "This means you can say with some confidence that monetary policy is currently somewhat restrictive. But the question is whether it is restrictive enough?" he said. This year, Australia is implementing one of the most aggressive monetary tightening policies among developed economies. The RBA has raised the cash rate by a cumulative 100 basis points and signaled that further hikes may be needed. Since late 2025, Australia has been dealing with renewed price pressures. Even before the attacks on Iran by the United States and Israel triggered a global energy shock, the RBA had already begun raising the cash rate. Kent said the Middle East conflict is the most notable adverse supply shock the bank currently faces, "which makes the trade-off among inflation, economic activity and the unemployment rate even more difficult."