EU Midday Digest - 19 Aug 2026

RBA holds 4.35% cash rate "restrictively tight" with no cuts priced before late 2027 as core inflation runs 4.1%

Overnight & European Session

Asia-Pacific equities sold off sharply with the Nikkei 225 down 3.16% to 65,326 and KOSPI triggering a circuit breaker, while European markets opened marginally higher (Euro Stoxx 50 +0.11% to 6,475) as investors digested the RBA's explicit hawkish guidance against a backdrop of Chinese growth concerns. The US dollar softened overnight (DXY -0.29% to 99, EUR/USD +0.26% to 1.1613) as Treasury yields flattened — 2-year up 5bps to 3.70% but 10-year down 38bps to 4.71% — reflecting the $377bn ultra-short bill supply announced by TreasuryDirect for this week. Gold surged 1.30% to US$ 4,423 and Brent crude rose 0.98% to US$ 91.91 on Strait of Hormuz tanker rerouting. AUD/USD held firm near 0.67 after RBA Deputy Governor Kent signaled the cash rate will remain at 4.35% until inflation sustainably returns to the 2–3% band, with markets pricing no cut before late 2027.

Key Themes Today

• RBA: Deputy Governor Kent declared policy "restrictively tight" and warned "any premature easing would risk re‑anchoring inflation expectations," citing headline CPI at 3.7% YoY and core at 4.1% — both above the 2–3% target. Labour market tightness (unemployment 3.6%, wage growth 4.3% YoY) and household debt‑to‑income at 190% justify the stance. Kent ruled out cuts before late 2027 and said forward guidance will be used sparingly, implying more data‑dependent volatility. This keeps AUD carry appeal intact and Australian yields elevated (per RBA Speeches).
• Canada: The Bank of Canada held the overnight rate at 2.25% (Bank Rate 2.5%, deposit 2.20%) and published its 2027 policy calendar, arguing the stance is neutral with inflation progressing toward target. However, Statistics Canada reported July CPI accelerating to 3.0% YoY (from 2.8%) with a 0.3% monthly rise, while the labour market added 75k jobs and unemployment fell to 6.4%. Net foreign portfolio inflows of $5.4bn in June (foreigners bought $40.8bn vs Canadians' $35.4bn abroad) support CAD, but accelerating inflation complicates the "neutral" narrative (per BoC Press Releases, Statistics Canada Prices & Labour).
• UK Housing Split: ONS data reveal a historic divergence: private rental inflation annualised at 9.6% (PIPR +0.8% MoM) versus house‑price growth slowing to 3.2% YoY with a -0.2% monthly print — the first decline since 2020. Import prices now drive CPIH (+0.45pp contribution vs +0.12pp from wages), limiting domestic easing efficacy. Regional disposable income gaps widen (South‑East +4.2% vs North‑East +1.1%). This forces a decoupling of rental‑focused REITs from traditional residential exposure (per ONS Release Calendar).
• BIS Liquidity Shift: BIS global liquidity indicators show euro‑denominated foreign‑currency credit expanding faster than USD‑denominated credit in both Q4 2025 and Q1 2026. Cross‑border bank credit surged 11% YoY to end‑March 2026, broad‑based across instruments and sectors. EM credit jumped $148bn in Q1, concentrated in Africa, Middle East and emerging Europe. Real global house prices fell 0.6% YoY (EM -1.4%, advanced +0.4%), with Italy, China, South Africa, Brazil and Indonesia still below post‑GFC peaks (per BIS Statistical Releases).
• SEC Crypto Framework: The SEC proposed "Regulation Crypto Assets" to create a fit‑for‑purpose regime for crypto investment contracts, scoring 6.0/10 relevance versus 0.2/10 for the Tricolor Holdings $1.9bn fraud case. The proposal effectively expands the "security" definition via the Howey test, aligning with regulatory trends in Argentina, Switzerland, India and Norway (macro regime match). This could unlock institutional flows into compliant crypto products, benefiting custodians and regulated exchanges, while non‑compliant tokens face registration pressure (per SEC Press Releases).

What to Watch

Wednesday's FOMC minutes (July meeting) will be parsed for dissent beyond Logan, Hammack and Kashkari; Fed funds futures price only ~31% chance of a September hike (per InvestingLive). ECB's Rehn reiterated "no clear signs of second‑round effects" but markets price ~90% odds of a September hike and 58bps by June 2027 — a divergence with the Fed that supports EUR/USD upside (per InvestingLive). Canada's 2027 policy calendar is now fixed; watch for any deviation from the implied path. UK CPIH import‑price contribution (+0.45pp) and rental inflation (9.6% annualised) are the inflation pulse to monitor. US Treasury auctions $377bn in 4‑, 6‑, 8‑ and 17‑week bills this week — weak bid‑to‑cover ratios could spike short‑term yields and reinforce Fed tightening bias (per TreasuryDirect). Open question: Will the RBA's late‑2027 cut guidance survive the next quarterly CPI print, or will persistent core inflation force an even longer hold?