Key insights from the week that was.

In Australia, all eyes were on the Q4 CPI print ahead of next week's RBA decision. In the event, inflation printed above our expectations on both a headline and trimmed mean basis, rising 0.6%qtr / 3.6%yr and 0.9%qtr / 3.4%yr respectively. There were a number of subplots in the detail: strong seasonal demand for domestic holiday travel (9.6%yr), rising gold and silver prices boosting accessories (11.4%yr), and rebate-driven volatility in electricity prices (21.5%yr). Policy changes and administered price increases also buoyed inflation across childcare, education, water rates and property charges. There was some evidence of disinflation too, mainly in home-building costs and rents where inflation looks to have peaked. Overall though, it appears services inflation remains 'sticky' well above target (4.1%yr) and that goods inflation is no longer providing a disinflationary offset (3.4%yr).

Following the CPI report, Chief Economist Luci Ellis issued a change of rate call, with Westpac now anticipating the RBA to lift the cash rate by 25bps to 3.85% at next week's meeting. The RBA laid the groundwork for such a move in their communications over recent months in case of an upside surprise; and with two disappointing quarterly prints now received, there is little reason wait. How the policy outlook will evolve beyond February is set to depend on the response to the change in policy expectations and the economy's capacity, particularly labour market participation. The RBA's updated forecasts will shed more light on their baseline expectations and view of key risks; they are likely to continue to hold a relatively conservative view on supply and a cautious approach to communicating on the policy outlook.

The latest NAB business survey meanwhile reported a solid finish to 2025, the conditions and confidence indexes edging higher in December, consistent with other evidence of strengthening consumer demand. That said, the future path for inflation and interest rates is a clear threat to confidence in early-2026. Worthy of note too, perspectives differ across industries. In our latest Quarterly Agriculture Report, we discuss prospects for farm GDP following a bumper 2025.

In the US, the FOMC maintained its monetary policy stance at the January meeting as expected in a 10-2 vote, with Miran and Waller preferring to cut the fed funds rate by 25bps. The Committee's assessment of the economy was positive for growth (characterising it as "solid") notwithstanding weakness in housing; sanguine on the labour market ("the unemployment rate has shown some signs of stabilization") despite job gains having "remained low"; and cautious on inflation ("remains somewhat elevated").

The characterisation of risks was balanced, the statement simply noting that "Uncertainty about the economic outlook remains elevated", the "Committee is attentive to the risks to both sides of its dual mandate" and "prepared to adjust the stance of monetary policy as appropriate". In the press conference, Chair Powell made it clear that policy will be determined on a meeting-by-meeting basis on incoming data and did not show material concern over the potential evolution of conditions. Instead, risks were judged to have diminished.

Recent weakness in the US dollar was a key topic during the Q&A. Chair Powell made clear market movements do not dictate monetary policy, nor does the FOMC seek to manage the currency, with full employment and inflation-at-target their mandated focus. Chair Powell did not comment on recent tensions between the Administration and the Federal Reserve but took the opportunity to affirm the long-standing success of central bank independence and monetary / fiscal collaboration globally.

We expect one further cut from the FOMC in March to mitigate the lingering downside risks the labour market faces. But if activity growth proves stronger than expected at the beginning of 2026, the FOMC may skew their focus towards inflation risks, holding off on a further reduction in the fed funds rate.

Further north, the Bank of Canada also kept rates steady at 2.25%, maintaining an accommodative stance to support the economy as it navigates excess capacity and trade uncertainty. Governor Macklem noted that the "current policy rate remains appropriate, conditional on the economy evolving broadly in line with the [forecast] outlook …The Canadian economy is adjusting to the structural headwinds of US protectionism…[and] uncertainty makes it difficult to predict the timing or direction of the next change in the policy rate." We anticipate the Council will keep policy accommodative while headwinds persist.

Source: Westpac Banking Corporation