Summary of Monetary Policy Divergence: Australia & Eurozone CPI and the EUR/AUD Tumble

On January 8, 2026, Moheb Hanna provided an analysis of the contrasting monetary policies of the Reserve Bank of Australia (RBA) and the European Central Bank (ECB) in light of recent Consumer Price Index (CPI) data from both regions.

Australia's Economic Landscape

The RBA is facing a challenging situation as core inflation remains above its target. The latest CPI data showed a moderation in headline inflation to 3.4%, down from 3.8% in October, but core inflation only slightly decreased to 3.2%. This persistent inflation, particularly in housing and electricity costs, suggests that the RBA may need to consider a "preventative" rate hike to curb inflation expectations.

Eurozone's Economic Stability

In contrast, the Eurozone's CPI data revealed that headline inflation has finally met the ECB's target of 2.0%, down from 2.1% in November. This achievement is attributed to a significant drop in energy prices. However, core inflation remains a concern at 2.3%, with services inflation still high at 3.4%. The ECB is likely to maintain a "steady hand" approach, avoiding further rate hikes while monitoring the situation.

Impact on EUR/AUD Exchange Rate

The divergence in monetary policy has led to a notable decline in the EUR/AUD exchange rate, which fell to a 15-month low of 1.7300. The market has priced out further tightening from the ECB while anticipating a potential hike from the RBA. This shift has created a "carry-trade" incentive for traders, favoring the Australian Dollar over the Euro.

Conclusion

The contrasting monetary policies of the RBA and ECB highlight the complexities of managing inflation in different economic environments. As the RBA considers a potential rate hike, the ECB remains cautious, leading to significant movements in the EUR/AUD exchange rate.