Key insights from the week that was.
In Australia, the RBA’s July Minutes provided more colour around the Board’s diverse set of views on the balance of risks and the subsequent split decision. The case to cut the cash rate rested on the opinion that the current forecasts for inflation to settle around the mid-point of the target band and the recovery in economic growth may be too optimistic. This risk, particularly as it relates to a potentially slower pick-up in consumer spending, is clearly evident in recent card activity data.
While a minority of Board members favoured this view, the majority saw a small degree of upside inflation risk in the recent run of partial data, and hence sought to remain patient until the full quarterly reading can be assessed. The ultimate decision to keep policy unchanged underscores the majority’s preference to move policy in a ‘cautious and predictable’ manner. Provided the quarterly inflation data continues to indicate that inflation is on track to return to the mid-point of the target range, as we anticipate, August remains the most likely timing for the next rate cut.
Later in the week, Governor Bullock delivered a speech that largely reiterated the messaging from the decision statement and the minutes, but explored more detail in other areas. In this week’s essay, Chief Economist Luci Ellis delves into the RBA’s current thinking on the interaction between the supply and demand-sides of the economy and its implications for productivity.
Before moving offshore, our latest industry report puts the spotlight on Australian agriculture, assessing current trends for production and costs, the outlook for selected key commodities, and how well the industry is placed to weather the impact from US tariffs.
Globally, market participants continue to focus on US trade policy rumours and announcements. To date this week, the Trump administration has announced a 19% tariff on the Philippines and 15% for Japan, the former a touch higher than Liberation Day, the latter modestly below. Notably the 15% tariff rate for Japan applies to automobiles instead of the standard 25% rate, putting Japanese vehicle manufacturers at a significant advantage to those from South Korea and Europe who are yet to come to terms with the US on a deal.
Securing Japan’s improved terms was a commitment by the nation to invest USD550bn in the US economy through a fund that will reportedly provide equity financing, loans and other support to manufacturing plants, infrastructure and other investments in the US, according to Commerce Secretary Howard Lutnick. The significance of the deal for Japan was evident in the strong equity rally for Japanese automotive producers over the week.
Also of significance for Japan, ahead of the trade agreement announcement, the LDP–Komeito coalition experienced a historic loss, winning just 47 of the 50 seats required in Japan’s upper house election to maintain a majority. This comes after the coalition lost its majority in the lower house last year. The outcome reflects voter frustration amid compounding cost-of-living pressures, including a doubling of rice prices, and perceived government mismanagement. A multi-party coalition to unseat the LDP–Komeito alliance remains unlikely, but the resulting split government will make it more difficult for Japan to implement reforms aimed at boosting domestic demand and stabilising inflation at target.
For monetary policy and data, Europe was the focus this week. The ECB’s Governing Council kept its policy rates unchanged at the July meeting. In the statement, they highlighted that “Domestic price pressures have continued to ease, with wages growing more slowly” while “the economy has so far proven resilient overall in a challenging global environment”. On the outlook for policy, President Lagarde continued to emphasise that the Council is “well positioned” and “will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance”.
“Risks to economic growth remain tilted to the downside. Among the main risks are a further escalation in global trade tensions and associated uncertainties, which could dampen exports and drag down investment and consumption.” Moreover, a ” stronger euro could bring inflation down further than expected…. [and] inflation could turn out to be lower if higher tariffs lead to lower demand for euro area exports and induce countries with overcapacity to reroute their exports to the euro area”. This skew in risks leads us to believe the ECB will likely deliver another 25bp cut at the September policy meeting and thereafter remain on hold at the lower-end of its neutral range, absent a material shock to activity or inflation.
The ECB bank lending survey for Q2 2025 also favours further easing, reporting “broadly unchanged credit standards for loans to firms amid geopolitical uncertainty and trade tensions” while “Credit standards tightened slightly for housing loans and more markedly for consumer credit”. “Firms’ demand for loans increased slightly in net terms but remained weak overall.” Meanwhile, “Demand for housing loans continued to increase substantially… [but] demand for consumer credit increased only slightly”. In sum, uncertainty over the outlook continues to limit the benefit of policy easing to economic growth.
