Key insights from the week that was.
It was a particularly quiet week for Australian data, with August’s Monthly CPI Indicator the only release of note. At 2.9%yr, August’s result landed between the market’s expectation and our own. Within the detail, the key surprise was a 0.4% increase in dwelling costs, the ABS noting that project home builders increased prices and reduced discounts in some cities. Insurance costs also rose more than expected. Offsetting this inflation was a 6.3% decline in electricity prices as households in NSW and ACT received their first payment from the extended Commonwealth Energy Bill Relief Fund.
While some in the market hold this result to be a material threat to inflation’s anticipated return to the mid-point of the target range, our profile for headline inflation is unchanged and the trimmed mean forecast for Q3 only a touch higher. Moreover, we still anticipate a sustained return to target for both headline and trimmed mean inflation long before the end of the forecast period. As detailed by Chief Economist Luci Ellis, while a November cut is now less certain, it remains our base case. So are follow-up cuts in February and May 2026, taking the cash rate to a 2.85% cycle low.
Over in New Zealand, the new RBNZ Governor was announced. Dr Anna Breman, currently the First Deputy Governor of Sweden’s central bank, will begin her 5-year tenure as RBNZ Governor on 1 December 2025. New Zealand’s Minister of Finance Nicola Willis noted that she does not intend to change the RBNZ’s inflation target, and Dr Breman stated at a press conference that the RBNZ will remain “laser focused on low, stable inflation”. Acting RBNZ Governor Christian Hawkesby will remain Governor until December, overseeing the 8 October OCR review and 26 November Monetary policy statement which our New Zealand Economics team expects will deliver respective cuts of 50bps and 25bps. Mr Hawkesby will depart the RBNZ after Dr Breman commences; his role on the MPC will need to be filled early next year. For an outline of some of the policy issues Governor Breman may face in 2026, see Westpac New Zealand Chief Economist Kelly Eckhold’s bulletin.
With the data flow restricted to second and third tier releases, Fedspeak was the market’s focus in the US this week.
Chair Powell emphasised risk management during his prepared remarks and Q&A, justifying the 25bp cut delivered with the loss of momentum in job creation and growing downside risks to the currently balanced labour market. Chair Powell sees the resulting policy stance as modestly restrictive and therefore still helpful in managing lingering upside inflation risks, which are primarily seen as a consequence of tariff implementation – a one-off shock. Bostic, Goolsbee, Schmid, Musalem and Hammack all, to varying degrees, expressed lingering concern over inflation this week while also recognising labour market softening. Broadly they are likely to support a slow return towards neutral as the data shows inflation and associated risks abating.
Vice Chair for Supervision Bowman’s remarks were, in contrast, decidedly dovish. Bowman made clear that she believes inflation’s persistence near 3.0%yr was broadly due to tariffs, noting that PCE inflation excluding estimated tariff effects was 2.5%yr at August, “within range of our target”. Much of the rest of her remarks were focused on the deceleration underway in job creation and the risks of a continued deterioration in the trend to outright job shedding. Concern that the FOMC may be falling behind in their policy actions leads her to believe policy should continue to be eased towards a neutral stance in coming months.
Of the data received, August durable goods orders was most topical. The headline measure exceeded expectations, rising 2.9%mth. Core goods orders (non-defence, ex aircraft) were in contrast up just 0.6%, emphasising the importance of transport and defence equipment to US manufacturing. Investment in the broader economy, outside of AI-related spending, remains soft and fickle. Highlighting this, the Richmond Fed manufacturing index declined from -7 to -17 in September as expectations for capital expenditures remained weak at -11. Looking to the medium term, the weakness in investment is not just a risk for economic growth but also for inflation. Weak investment in 2025 and 2026 will restrict capacity thereafter, leading to excess demand and price pressures. This is why we remain concerned that US inflation will be much more difficult to return sustainably to the 2.0%yr target than the market and FOMC currently expect.
