ABE Weekly: The Great Central Bank Return to Tightening

Market Insights

• The Great Central Bank Return to Tightening
• First Hike by US FED since July 2023
• ECB Raising Deposit Facility in Europe
• Bank of Japan taking Rates to The Highest level in 31 Years
• China’s Export Strength Masks a Deflationary Domestic Recovery

The Great Central Bank Return to Tightening

Key Points

• Australia: The RBA left the cash rate unchanged at 4.35% p.a. at its August meeting. July CPI eased to 3.5% p.a., while Trimmed Mean was unchanged at 3.60% p.a.
• United States: The Federal Reserve raised the federal funds target range by 25bp to 3.75%–4.00% p.a. at its September 2026 meeting, its first rate hike since July 2023. The latest U.S. CPI inflation rate remained at 3.4% p.a. in August 2026, while core CPI eased to 2.4% p.a.
• United Kingdom: The Bank of England held Bank Rate unchanged at 3.75% p.a. at its September 2026 meeting. Headline CPI rose to 3.1% p.a. in August, while core CPI remained unchanged at 2.6% p.a.
• Eurozone: The European Central Bank increased its key deposit facility rate by 25bp to 2.50% p.a. at its September 2026 meeting. Euro area headline CPI rose to 3.3% p.a. in August, from 2.9% in July, while core inflation eased to 2.4% p.a.

The Great Central Bank Return to Tightening

The US Fed hikes for the first time since July 2023: it increased the federal funds target range by 25bp to 3.75–4.00%, as inflation remains elevated and economic activity continues to expand at a solid pace.

The ECB also raised its deposit facility rate by 25bp to 2.5%, as headline inflation is expected to remain well above target for an extended period amid renewed energy price pressures.

The Bank of England, meanwhile, held Bank Rate unchanged at 3.75%, although its 6–3 vote, with three members favouring a 25bp hike, highlighted growing concern over upside inflation risks. UK CPI increased to 3.1% in August and is expected to rise further over coming quarters.

The Bank of Japan also joined the tightening cycle, raising its policy rate as expected by a further 25bp to 1.25% in a 7–2 vote, taking rates to their highest level in 31 years. The move reflects growing concern that inflation could overshoot the BoJ’s 2% target, with the Bank indicating that further normalisation will depend on economic and price developments.

China’s Export Strength Masks a Weak Domestic Recovery

While market attention remains focused on the US, China is also worth watching closely from an Australian perspective given its importance as Australia’s largest trading partner. Recent Chinese data continue to present a mixed picture. The August manufacturing PMI improved to 49.8 from 49.2 in July, although it remains below the 50 level that separates expansion from contraction. August industrial production grew 5.2% year-on-year, but retail sales increased by only 0.4%, highlighting continued weakness in domestic consumption. Fixed-asset investment fell 7.2% over the first eight months of the year, while real estate investment declined 19.9%.

At the same time, China’s external sector remains considerably stronger. August exports rose 25% year-on-year and imports increased 28.2%, resulting in a trade surplus of around US$119bn. Strong growth in high-tech exports, including semiconductor and AI-related products, has helped support the external sector.

The divergence between resilient exports and subdued domestic demand remains one of the defining features of the Chinese economy.