FXT Economic Data Summary (Asia-Pacific | 09/23)

RBA Keeps Close Watch on Upside Inflation Risks

Higher interest rates in Australia are gradually cooling the economy, with the housing market showing the clearest impact. RBA Assistant Governor Sarah Hunter said the housing market has slowed relatively quickly, while tighter financial conditions are also weighing on broader demand. With the cash rate at 4.35%, higher borrowing costs are restraining housing, consumption and investment, showing that monetary tightening is taking effect.

However, the housing slowdown has not eased the RBAs inflation concerns. Its August meeting noted that inflation risks remain tilted to the upside, while Middle East tensions and higher energy prices could add further cost pressures. If these pressures spread to goods, services and wages, another rate hike could still be considered. FXT analysis suggests that while weaker demand shows tighter policy is working, inflation uncertainty remains elevated, making a near-term shift toward easing unlikely.

Higher Oil Prices Have Yet to Change the BoCs Policy Direction

Canadian inflation has recently been pushed higher by energy prices. Bank of Canada Governor Tiff Macklem said CPI inflation has remained around 3% in recent months, partly due to higher fuel costs. If oil stays near $100 a barrel, headline inflation could rise slightly further. The BoC estimates that a 10% increase in oil prices typically adds around 0.2 percentage points to CPI inflation, although there is little evidence so far of broader spillovers into other goods and services.

Meanwhile, trade conditions are weighing on the economic outlook. Recent tariffs directly affect around 5% of Canadian goods exports to the U.S., and prolonged trade tensions could push fourth-quarter growth below 1%. Weak demand may also limit companies ability to pass on higher costs, leaving the BoC focused on whether the energy shock becomes more persistent. FXT analysis suggests the central bank can remain patient while price pressures stay concentrated, but broader inflation could prompt a tighter policy stance.

Fed Watches for Stronger Demand and Inflation Pressures

Chicago Fed President Austan Goolsbee said the Fed has traditionally waited for shocks from oil, tariffs and supply chains to fade, but that approach is becoming more difficult. Supply disruptions have grown more frequent and persistent, while expectations for peak inflation have been pushed back from late 2025 toward 2027. If price pressures remain elevated, the Fed may eventually need to restrain demand even though monetary policy cannot directly resolve supply-side problems.

Goolsbee is also watching services inflation and demand generated by artificial intelligence investment. If AI data-center construction drives stronger spending on equipment, construction, energy and employment, it could increase overheating risks. However, he gave no specific timing or scale for another rate hike. FXT analysis suggests the Fed is placing greater emphasis on persistent inflation and demand pressures, and further tightening could become more likely if supply shocks linger while demand remains strong.

ECB Plays Down a Direct Link Between Energy Prices and Rates

The ECB is not prepared to adjust interest rates mechanically in response to energy prices. Christine Lagarde said higher energy costs can raise inflation while simultaneously weakening consumption and economic growth, requiring policymakers to consider both effects. Markets currently expect another three to four rate hikes over the next year following two previous increases, with year-end inflation potentially approaching 4%, but the ECB still needs to determine whether the energy shock will create more persistent price pressures.

Long-term bond yields have risen recently, although Lagarde said market conditions have not become disorderly. The ECB has not ruled out further rate increases, but it is also reluctant to tighten automatically in response to higher oil and gas prices, as rising financing costs already weigh on demand. FXT analysis suggests the key issue will be whether energy costs spread into broader prices, with inflation persistence likely to determine the scale and pace of any further tightening.