Economic Update - August 2026

Three months into the job and Fed Chair Kevin Warsh is still facing questions over his credibility. In particular, the bond market still has questions. Meanwhile, in Australia, the RBA governor stated that the RBA was willing to raise rates for the fourth time this year. Despite the rate increases, and unlike the UK or Europe, the Australian economy remains in rude health.

What happened in Australia?

On 11 August, the RBA kept the cash rate steady, but RBA Governor Michele Bullock warned that they were ready to raise rates higher if needed.

“But we have raised rates three times, and we will go again if we need to.” Michele Bullock, Monetary Policy Decision media conference.

The RBA is still concerned with resilient domestic demand and fuel costs that are remaining higher for longer because of the “it will be over soon” war against Iran.

Since the RBA’s meeting, new data will have strengthened the RBA’s resolve.

Headline inflation fell in July, but not as much as the market had expected. While the RBA’s preferred inflation measure, the trimmed-mean, was flat.

Similalry, June-quarter GDP slowed but was faster than expected. The market expected growth of 0.3% for the quarter and 1.8% over the year; instead, growth came in at 0.4% and 2.1% respectively. At over 2% annually, demand is still likely outstripping supply.

But while inflation and GDP are at least slowing, household spending in July actually increased over the year, with discretionary spending rising faster than overall spending (see chart below). This may be the data that pushes the RBA into action.

The implied probability of a 25 bps increase in September is now at 76%. August inflation would have to surprise on the downside to stay the RBA’s hand. Either that, or there is an actual resolution to the Iran war.

What happened around the world?

USA

“It’s at least arguable—I mean, you don’t have to get particularly political to say that the U.S. government doesn’t sound the way it used to sound.” Paul Krugman in conversation with MIT Professor Ricardo Caballero. 25 August 2026.

When the US Treasury intervened in the yen market last month, it was not just about the yen. The intervention also stopped Japan from dumping US treasuries for yen. Fast forward to August 19, and US Treasurer Scott Bessent announced plans to buy billions in long-dated US treasuries to take the pressure off yields. Hedge-fund veteran and former Bessent and Kevin Warsh mentor Stanley Druckenmiller (with the help of AI) openly criticised the decision in the Wall Street Journal.

“Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding,”

Druckenmiller should know; he and George Soros were the ones who made a billion by betting against the British pound in 1992.

Bessent is unfazed and plans to go ahead with his interventions.

This, however, makes Fed Chair Warsh’s rhetoric less plausible. How is the Fed meant to stop forward guidance and listen to the market when the US Treasury is intervening in the bond market? Lower yields also further stimulate the economy!

Warsh’s speech at Jackson Hole was more anticipated than the release of the new Spider-Man movie. With PCE and core PCE flat and still above 3% in July (see chart below) and after his lacklustre July media conference, the market wanted and needed more from Warsh at Jackson Hole.

Most commentators got the hawkish sentiment they wanted, information on what statistic Warsh is looking (core PCE), and even, dare I say it some forward guidance.

“Inflation is running above our 2 percent target. So the Fed's predominant focus right now should be on prices.” Kevin Warsh.

However, others are not so convinced. They still believe that Warsh is trying to create wiggle room and that he may not even raise rates in September or October. For these commentators, his talk on the speed of inflation and detail on PCE components was an obfuscation. Further, according to the Atlanta Fed’s Taylor Rule estimates, he should have already started raising rates (see chart below).

China

China continues to struggle, with industrial production and retail sales falling in July and below estimates (see chart below). Manufacturing PMI increased slightly in August but remains in contraction territory.

Strong earnings in the AI and high-tech sectors remain one of the few bright spots. For example, China’s largest contract chip maker, Semiconductor Manufacturing International Corp., tripled its profit over the year in the second quarter.  

EU

Euro area inflation rose from 2.9% in July to 3.3% in August. Like last month, energy was the main contributor (see chart below). This time it increased by 14.3% and included increases in gas, electricity, as well as transport. When excluding energy, inflation was flat at 2.2%. Markets are expecting the ECB to raise rates next week after raising them in June and pausing in July.

Japan

The economy grew for the third consecutive quarter, but growth was lower than estimates (see chart below). However, exports increased by 23.2% over the year in July, their fastest pace in over three years and following a 19.3% increase in June.

The yen trended down against the USD during the month but stayed below the levels that saw the US and Japan intervene last month. US Treasurer Scott Bessent recently said that he expected the BoJ to raise rates soon in order to support the yen.

UK

The economy grew at 0.4% over the quarter and 1.2% over the year in the June quarter. While slower than the March quarter, it was stronger than most of the preceding year (see chart below).

Inflation increased from 2.6% in June to 2.9% in July, with a 13% increase in the cap on gas and electricity costs being the main contributor (see chart below). The BoE is expected to look past the rise in energy costs and keep rates on hold when it meets next.

New Zealand

The RBNZ raised rates by another 25 bps at the start of September to help inflation fall to its target faster. It believes that improving economic conditions will allow the economy to sustain another rate rise.

What this means for Australian Private Debt

The Australian economy continues to grow. This will enable the RBA to raise rates sooner in order to bring down inflation faster. Inflation fell in July, but not as much as expected. Most other advanced economies are also looking to raise rates or have already raised rates as higher energy costs take their toll. Being first to raise rates should hopefully help Australia bring inflation down sooner. Australia’s growth and its central bank help ‌it stand out from other advanced economies.