Key takeaways from the week’s economic and market developments.
Following its review of the latest National Accounts, the Fund revised its Reserve Bank of Australia forecast, reinstating a 25-basis-point rate increase in November. Domestic demand is proving more resilient than expected, supported by stronger household incomes and a substantial pipeline of data-centre and renewable-energy investment. That momentum is slowing the pace of disinflation.
Markets currently assign roughly an 80% probability to a September rate increase. However, we believe the Board is more likely to await confirmation from the full quarterly inflation data and its revised forecasts.
This week’s sentiment surveys also highlighted the continuing downside risks to Australian growth.
The Westpac-MI Consumer Sentiment Index fell sharply in September, dropping 5.2% to 84.4. The decline erased much of August’s gain and pushed sentiment close to the pessimistic levels recorded in early 2026.
Cost-of-living pressures remained a central concern, reflected in a 9.2% monthly decline in the measure of family finances compared with a year earlier. Rising fuel prices, renewed concerns about persistent inflation and anxiety over the possibility of further monetary tightening all weighed on sentiment. Together with pessimistic views of the housing market, they also drove both one-year and five-year economic-condition measures lower by 4.0% and 4.5%, respectively.
Business sentiment offered little reassurance. The August NAB Monthly Business Survey showed confidence slipping further into negative territory to -8, while business conditions fell five points to -1, their weakest level since the pandemic.
Weakening profitability was the primary driver, reaching its lowest level in years as companies confronted softer demand, higher borrowing costs and elevated input expenses. Purchase-cost and labour-cost growth remained above average, while trading conditions deteriorated to cycle lows. For businesses, the outlook for consumers continues to present significant downside risks.
Overseas, the flow of economic data was limited ahead of the ECB meeting and the upcoming US CPI release.
Early-week euro-area data were encouraging. The third estimate of second-quarter GDP growth was revised from 0.4% to 0.6%, lifting the annual growth rate to 1.2%. Household consumption increased 0.4% during the quarter, while government expenditure rose 0.2%. Business investment declined slightly by 0.1%, partly offsetting that strength. Employment also edged higher, maintaining full employment and suggesting that marginal labour supply remains available to meet demand.
US producer-price inflation then matched expectations in August, accelerating from a revised 0.1% in July to 0.4%. Excluding food and energy, prices rose 0.2%, marginally below forecasts. The July figure for this measure was revised up by 0.1 percentage point to 0.3%. Year-on-year headline PPI inflation increased to 5.4%, while ex-food-and-energy inflation reached 4.6%.
Following last Friday’s stronger-than-expected US nonfarm payrolls report—which showed 162,000 new jobs, alongside 55,000 upward revisions to June and July—and the recent surge in oil prices, the PPI data further intensified concerns about inflation. The yield on the US 10-year Treasury rose to just below 5.0%. At the shorter end of the curve, investors are now considering whether to price in a fourth 25-basis-point FOMC increase over the next year, with three increases fully reflected in forecasts by April.
As anticipated, the ECB delivered a 25-basis-point rate increase at its September meeting. Officials described the risks as skewed toward higher prices and warned that inflation would remain well above target for an extended period, largely because of the effects of the Middle East conflict and the Russia-Ukraine war on energy costs.
The ECB’s new staff projections estimate headline inflation at an average of 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028. Inflation excluding food and energy is projected at 2.5%, 2.6% and 2.3%, respectively. The 2026 forecast is unchanged, but projections for 2027 and 2028 are higher than in June. Despite persistent inflation and the need for tighter policy, the ECB remains positive about the growth outlook, forecasting economic expansion of 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. The revisions for 2026 and 2027 mainly reflect greater-than-expected resilience in the euro-area economy.
The Governing Council recognises the substantial uncertainty and risks ahead and remains committed to setting policy on a meeting-by-meeting basis. Its guidance indicates that it is comfortable with the current policy stance while retaining the flexibility to adjust rates in response to developments and fulfil its medium-term mandate.