Key insights from the week that was.
In Australia, the long-awaited Q3 CPI printed materially above market expectations, both on a headline (1.3%qtr/3.2%yr) and trimmed mean (1.0%qtr/3.0%yr) basis. This does not look to be isolated to ‘one-offs’, creating a firmer starting point for inflation moving into the second half of this year. Goods inflation is not providing as much of a disinflationary offset as before – a key dynamic evident globally; but more critically, market services inflation remains ‘sticky’ around the top of the RBA’s 2-3% target band. We are also wary of the fact that some key sub-components are showing signs of a more sustainable pick-up, which suggests that upside risks may also lie ahead.
Earlier today, Chief Economist Luci Ellis detailed the changes to our RBA cash rate forecasts. For the RBA to remain confident that inflation will settle at the mid-point of the target range, multiple quarterly readings on inflation will need to be assessed in detail. For that reason, we now anticipate the RBA to remain on hold until mid-2026, when we expect it will deliver 25bp rate cuts in May and August, bringing the cash rate to 3.10%. We view the risks around our base case as relatively balanced. Given policy is currently restrictive, any further delay raises the probability that the RBA will eventually have to cut the cash rate by more than 50bps to a 2-handle. The recent softening in labour market conditions will remain a key consideration too, but it would take a material weakening beyond our current forecast to warrant the RBA moving any earlier than May.
The FOMC meeting was the most closely watched policy engagement of the week globally. The Committee decided to cut the fed funds rate by 25bps to a midpoint of 3.875% and also announced an end to quantitative tightening from 1 December. There was dissent on both sides for the rates decision, with Miran favouring a 50bp cut but Schmid no change. From the tone of the statement and Chair Powell’s press conference guidance, the Committee remains positive on the underlying health of the US economy and are not overly concerned by the shut down – believing its economic impact will quickly reverse and, in the meantime, that authorities still have enough information on the economy to recognise a material adverse turn, if it were to occur. The October cut was instead characterised as a marginal risk management decision given “downside risks to employment rose in recent months”.
Most members also continue to show concern over upside risks for inflation. In the press conference, Chair Powell stated a rate cut in December is “far from a foregone conclusion” with “strongly differing views” on the short-term path for policy. Later in the press conference, Chair Powell added that a “growing chorus feels like maybe [the] Fed should wait a [meeting] cycle” to assess conditions. While absent from the FOMC’s current narrative, we also continue to believe that capacity is limited in the US economy and so see upside risks to the market’s expected policy rate path to, or through, 3.00% over the next 12 to 18 months. Clearly, if our expectations prove prescient, long-term yields are also likely to rise.
On the same day as the FOMC, the Bank of Canada also cut by 25bps to 2.25%. Guidance suggests this is likely to be the trough for the foreseeable future, with the policy rate now seen as “at about the right level”. Growth forecasts were revised down, but the supply shock created by US trade policy is limiting authorities’ ability to stimulate growth while keeping inflation near target.
The Bank of Japan then held its policy rate steady in a 7-2 vote, mirroring September’s decision. Growth for the year ending March was revised up slightly (+0.1ppt) on improved trade certainty, while the inflation projections were broadly unchanged. Inflation is expected to soften through 2026 due to easing food prices and base effects, but the Committee remains confident inflation will be near the 2.0% target at the end of the projection period. Inflation’s persistence and a tight labour market continue to support wage growth. However, weak firm profitability poses a risk to achieving policy’s goal. The Committee reiterated its commitment to further rate hikes but gave no timing guidance. We expect the next move in March, though stronger-than-expected financial and wage data could bring January into play.
The ECB also delivered no surprises, the Governing Council keeping the deposit rate at 2.0%. No updated economic projections were published at this time, and the policy statement maintained the existing forward guidance wording – stating that the Governing Council “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance”.
President Lagarde struck a somewhat more positive tone regarding the euro area’s economic growth outlook, suggesting that the EU-US trade deal reached over the summer, the ceasefire in the Middle East, and progress in US-China trade negotiations have reduced some of the downside risks. Regarding inflation, Lagarde once again noted that underlying inflationary pressures remain consistent with the ECB’s target, reiterating her view that monetary policy is in a good place.
Towards the end of the week, the meeting between President Trump and President Xi delivered to expectations, with both sides discarding threatened actions and edging back protectionist measures already in place. The US agreed to halve the tariff related to fentanyl from 20% to 10% after China agreed to crack down on the production and distribution of the chemicals used to make it. China also agreed to buy soybeans from the US and delay the rare earth restrictions they had planned to put in place. Note though the licencing regime for rare earths announced earlier in the year will reportedly remain in place.
Evident in the initial readout from last week’s Plenum and a subsequent pledge by authorities to materially increase consumption’s share of China’s economy, President Xi and the Central Government are increasingly turning their attention away from relations with the US to domestic development priorities and the continued strengthening of relationships across Asia, South America and Africa. This is where China sees opportunity for activity and income growth and a further strengthening of China’s position in the global economy.
 and trimmed mean (1.0%qtr/3.0%yr) basis. This does not look to be isolated to ‘one-offs’, creating a firmer starting point for inflation moving into the second half of this year. Goods inflation is not providing as much of a disinflationary offset as before – a key dynamic evident globally; but more critically, market services inflation remains ‘sticky’ around the top of the RBA’s 2-3% target band. We are also wary of the fact that some key sub-components are showing signs of a more sustainable pick-up, which suggests that upside risks may also lie ahead.){kind=link}