RBA Reverses Course With Surprise Tightening as Inflation Reignites

Chinese President Xi Jinping met with his Uruguayan counterpart, Yamandu Orsi, in Beijing on Tuesday, calling for the two nations to jointly promote an "equal and orderly multipolar world." In remarks reported by a media pool, Xi also advocated for an inclusive and universally beneficial economic globalization, framing the cooperation as part of building a "community with a shared future for mankind."

Orsi's trip marks the first visit to the Chinese capital by a South American leader since the United States' invasion of Venezuela in January, which involved the capture of then-President Nicolas Maduro.

Geopolitical Context and Symbolism

The high-level meeting follows a series of visits to China by Western leaders this year, including Britain's Prime Minister Keir Starmer, Canadian Prime Minister Mark Carney, and Finland's Prime Minister Petteri Orpo.

According to Francisco Urdinez, a professor at the Pontifical Catholic University of Chile, the timing holds symbolic weight. "For Beijing, hosting Orsi signals that South American countries remain eager to engage, despite the increasingly polarized geopolitical environment," Urdinez explained.

Orsi, who arrived in Beijing on Sunday, stated his visit aims to "empower Uruguay in the world and generate opportunities, investment and development." He is leading a 150-person delegation, which includes business leaders, on a tour that runs until February 7 and will also include a stop in the commercial hub of Shanghai.

The Economic Bedrock of the Relationship

The diplomatic push is built on a strong trade foundation. In 2025, China was the primary destination for Uruguayan exports, which are dominated by agricultural products such as wood pulp, soybeans, and beef.

The economic data highlights a robust partnership:

• Uruguay recorded a trade surplus of $187.1 million with China in the first half of 2025.

• In return, the South American nation imports machinery, electronics, and chemicals from China.

New Agreements Target Deeper Cooperation

On Tuesday, the two countries signed a joint declaration to deepen their strategic partnership, alongside 12 other cooperation documents. These agreements cover a range of sectors, including science and technology, environmental cooperation, meat exports and imports, and intellectual property.

Orsi expressed Uruguay's desire to intensify "trade in goods, especially through diversification, and to invest much more strongly in the area of trade in services and investment." He described the China-Uruguay strategic partnership as being in "its best moment," adding that both countries have a responsibility to "commit to raising it to a new level."

Experts see significant room for growth beyond traditional exports. Dr. Diego Telias, a professor at Universidad ORT Uruguay and a researcher at ICLAC, noted that sectors like dairy hold considerable potential. He also pointed to a gap in service exports, an area "in which Uruguay has successfully engaged with markets such as the United States, the United Kingdom and Europe, but not yet with China."

Just as Japan seemed to be stabilizing its falling currency, Prime Minister Sanae Takaichi introduced a fresh wave of uncertainty with off-the-cuff remarks that appeared to favor a weaker yen.

During a campaign speech this week, Takaichi—who is widely expected to win this Sunday's snap election—triggered a yen selloff by highlighting the benefits of a devalued currency. While she later retracted the comments, government officials privately worry the mixed signals could derail a coordinated effort with Washington to support the yen.

The weak yen has become a major political issue. At home, it is blamed for driving up the cost of imports. Abroad, the Trump administration has voiced concerns that it could destabilize U.S. markets.

Tokyo Scrambles for Damage Control

Takaichi's remarks quickly caused alarm within her own administration. According to one official at the prime minister's office, a scramble ensued over the weekend to contain the market fallout.

"Officials were scrambling to respond through Takaichi's X social media account to clarify her intentions," the official stated.

In a post on her X account on Sunday, Takaichi clarified that she had no preference for the yen's direction. She explained that her earlier speech was meant to convey her goal of building an economy resilient to exchange-rate fluctuations.

Another official confirmed that the government ensured U.S. authorities were informed of Takaichi's clarification. So far, Washington has not publicly commented on the matter.

Contradicting Official Policy

The prime minister's initial comments stood in stark contrast to the government's official stance. After weeks of heavy downward pressure, close coordination between Tokyo and Washington—including rare rate checks by the New York Federal Reserve—had finally helped steady the yen.

Finance Minister Satsuki Katayama has repeatedly threatened market intervention to prop up the currency. She has also noted that U.S. Treasury Secretary Scott Bessent shares her concerns over the yen's excessive volatility.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said Takaichi's remarks exposed a deeper view. "It revealed a complete lack of a sense of crisis over the historically weak yen," he commented. "Instead, it laid bare that Takaichi's long-held belief that yen depreciation is beneficial to the economy remains unchanged."

Following the prime minister's speech, the yen gave up approximately half of the 7-yen gain it had recently made on the prospect of joint U.S.-Japan intervention.

Washington's Unwelcome Surprise

U.S. officials have been wary of the side effects of yen weakness, particularly the surge in Japanese government bond yields. According to Tsuyoshi Ueno, a senior economist at the NLI Research Institute, Washington is concerned that rising Japanese yields could ripple through U.S. markets, pushing up Treasury yields and triggering selloffs in American assets.

"From Washington's perspective, the remarks were also likely unwelcome," said Ueno.

Japanese government sources revealed that at a meeting in Davos, Treasury Secretary Bessent told Finance Minister Katayama that Japan's rising debt yields had triggered a "triple selloff" in the United States and urged Tokyo to respond. This bond rout in Japan, initially sparked by Takaichi's campaign pledge to waive sales tax on food, added to market volatility already stirred by President Donald Trump's trade threats against Europe.

The U.S. Treasury Department did not respond to a request for comment.

A Pattern of Off-the-Cuff Remarks

This is not the first instance of Prime Minister Takaichi making unscripted comments that diverge from carefully crafted policy. Weeks after taking office in October, her remarks in parliament on a hypothetical Chinese attack on Taiwan ignited a major diplomatic dispute with Beijing.

However, this candid style is also a source of her popularity, particularly among younger voters. A recent Asahi newspaper survey shows Takaichi's Liberal Democratic Party is on track for a landslide victory in the upcoming election, suggesting her approach of pursuing significant spending and tax cuts is likely to continue.

One government official, who wished to remain anonymous, expressed frustration with the prime minister's communication. "I read the whole of Takaichi's campaign speech, but I honestly wonder whether it needed to be said in the first place," he noted. "She rambled on, off the cuff without notes, but it's ultimately unclear what she was trying to say."

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The Reserve Bank of Australia has raised its benchmark interest rate for the first time in two years, signaling a renewed fight against inflation that is proving stickier than anticipated.

In a unanimous decision following its February policy meeting, the RBA lifted the cash rate by 25 basis points to 3.85%. The move marks a significant pivot, coming just six months after its last rate cut in August and reflects growing evidence that the Australian economy is running hotter than expected.

Australia Becomes a Policy Outlier

With this hike, Australia’s central bank finds itself in a small club. Alongside the Bank of Japan, the RBA is one of the only central banks in the developed world currently tightening monetary policy.

This contrasts sharply with the outlook in other major economies. Markets are anticipating potential rate cuts in the United States, the United Kingdom, and Canada, while the European Central Bank is expected to hold its rates steady for an extended period.

Markets React and Price In More Hikes

The RBA's hawkish turn immediately rippled through financial markets. The Australian dollar surged nearly 1.2% to $0.7027, while three-year government bond futures dropped 10 ticks to 95.64.

Investors are now betting that this is not a one-off adjustment. Market pricing implies an almost 80% probability of a follow-up hike in May, with expectations for a total of 40 basis points in additional tightening this year.

"With the RBA now expecting a slower moderation in inflation... the risk is clearly skewed toward a series of hikes rather than a one-off move," noted Harry Murphy Cruise, head of economic research for Oxford Economics Australia.

Why the RBA Moved: Inflation and a Tight Job Market

The central bank's decision was driven by a string of economic data that painted a picture of persistent economic strength and mounting price pressures. The probability of a February hike had already climbed to 78% among traders ahead of the meeting.

Key factors behind the policy shift include:

• Persistent Inflation: Consumer price growth has surprised on the upside for two consecutive quarters. The RBA’s preferred measure, underlying inflation, hit an annual pace of 3.4% in the fourth quarter, well above the central bank's 2% to 3% target range.

• Strong Labor Market: The unemployment rate unexpectedly fell to a seven-month low of 4.1% in December, suggesting labor market conditions remain tight.

• Robust Demand: In its policy statement, the RBA board noted that "private demand is growing more quickly than expected" and "capacity pressures are greater than previously assessed."

• Accommodative Financial Conditions: Strong consumer spending, record-high housing prices, and readily available credit for households and businesses all suggested that financial conditions were not restrictive enough to cool the economy.

The Long Road to Taming Inflation

The RBA's more aggressive stance follows a period where it prioritized preserving labor market gains, leading it to hike less aggressively than its global peers. However, after three rate cuts last year, inflation re-accelerated, forcing the bank to adopt a more hawkish position.

In a separate economic update, the RBA expressed uncertainty about whether financial conditions were truly restrictive, acknowledging that some indicators suggested they may have been accommodative. The bank now sees a risk of persistently high inflation even if it implements more than two rate hikes this year.

"Overall, it's clear that the RBA believes the road to disinflation will be a long and winding one," said Abhijit Surya, senior APAC economist at Capital Economics.

Surya predicts one more rate increase in May but cautions that more could be necessary. Since the RBA "doesn't expect underlying inflation to return to the mid-point of its 2-3% target even by early-2028, it's entirely possible that it will feel compelled to raise rates even higher."

A landmark trade agreement between the United States and India has ignited a rally in Indian markets, ending months of uncertainty that weighed on investor sentiment. The deal, announced by President Trump, involves significant tariff reductions and a major shift in India's energy purchasing policy.

What's in the U.S.-India Trade Agreement?

In a post on Truth Social, President Trump confirmed that he and Indian Prime Minister Narendra Modi had reached an agreement. The core terms of the deal include:

• The U.S. will lower its "reciprocal tariff" on India to 18%, down from 25%.

• India has committed to halt its purchases of Russian oil and buy more crude from the United States.

A White House official clarified that India's commitment on oil purchases would also lead to the removal of a separate 25% penalty previously levied against the country for its Russian energy imports.

Broad Market Rally Lifts Indian Equities

The news provided immediate relief to investors, with India's benchmark Sensex index surging 4.5% at Tuesday's market open before trimming some of its gains.

Major companies saw significant jumps in their share prices. Adani Ports & Special Economic Zone rallied 7.0%, Bajaj Finance climbed over 6%, and Reliance Industries added more than 4%.

Textile and Apparel Stocks Lead the Charge

The textile and apparel manufacturing sectors were among the biggest beneficiaries of the trade news.

• KPR Mill and Gokaldas Exports both surged 20%.

• Welspun Living saw its shares rise by 18%.

• Arvind Ltd. posted a 12% gain.

The positive momentum extended to other sectors as well. IT firms Infosys and Wipro each gained about 2%, following a strong session for their U.S.-listed shares. Financial firms also traded broadly higher, with Citi Research analysts noting that Indian banks stand to benefit from their exposure to export-focused industries.

Why the Deal Is a Game-Changer for India

Analysts view the agreement as a major positive for India’s economy and financial markets. Radhika Rao, a senior economist at DBS Group Research, called the deal "unmistakably positive," highlighting that high tariffs had been a primary drag on market sentiment over the last quarter.

The tariff reduction brings India's rates closer to those of most Southeast Asian nations, giving it a competitive advantage over China. The deal also provided a boost to the Indian rupee, which had been driven to record lows against the U.S. dollar partly due to trade policy pressures.

Key Uncertainties and Lingering Questions

Despite the initial optimism, analysts caution that the celebration could be premature as crucial details of the pact have not yet been released. The full economic impact of India's pivot away from Russian crude oil also remains unclear.

According to Charu Chanana, chief investment strategist at Saxo Singapore, the market's focus will now shift to execution. Key questions include which specific products are covered, the implementation timelines, and the enforcement mechanisms.

Investors will also be watching closely to see if the pledge to buy more U.S. oil will increase India's overall import bill, which could create new pressure on inflation and the rupee. Furthermore, analysts at Citi Research noted a need to examine the details of India's own tariff reductions, which "could have negative implications for some sectors."