Key insights from the week that was.
In Australia, the RBA Monetary Policy Board (MPB) unanimously decided to cut the cash rate by 25bps, a move that came as no surprise to market participants. This week’s decision chalks up a cumulative 75bps of rate cuts since February, highlighting the MPB’s intent to gradually reduce policy restrictiveness as underlying inflation settles sustainably at the mid-point of the target range. The MPB continued to emphasise a “heightened level of uncertainty”, meaning incoming data will remain critical to the pace at which policy is eased towards neutral.
In a video update midweek, Chief Economist Luci Ellis discussed the August decision and the RBA’s updated forecasts. Outside of the downgrade to the RBA’s productivity assumption – which fed into a lower growth profile without any consequences for inflation – key forecasts were broadly unchanged. Underlying inflation is expected to remain flat at 2.6%yr for the next two years before dropping to 2.5%yr in Dec-27 while the unemployment rate holds at 4.3%. These forecasts are predicated on a cash rate path similar to our own, so we remain comfortable calling for a further 75bps of easing to 2.85% on a quarterly pace to May 2026.
With inflation now largely under control, labour market developments are poised to receive a larger weight in the RBA’s reaction function. This week’s labour force data confirmed a gradual softening trend is re-emerging, with July’s around-average employment gain of +24.5k barely able to offset two months of essentially zero net job creation. The unemployment rate has also started to lift above the 4% mark. The fact that its recent rise has been driven by an increase in youth unemployment – a labour market cohort more sensitive to changes in the business cycle – signals a broader lift in total unemployment is likely in coming months.
The shifting balance of risks was also evident in the Q2 Wage Price Index. The 0.8% (3.4%yr) gain was in line with consensus and the RBA’s forecasts and suggests the labour market is no longer a source of material upside risk for inflation. The softening trend in employment was also evident in the NAB business survey despite an improvement in conditions (up to +5 in July). Private businesses are likely to limit their appetite for additional labour until a sustainable and broad-based uptrend in growth becomes evident.
Offshore, the major event was President Trump’s decision to extend the 90-day tariff truce between the US and China for another term. This follows the sharp escalation post-Liberation Day, where US tariffs surged to 145% before being scaled back to 30% under the initial truce, which China responded to with a tariff reduction to 10%. Talks continue toward a lasting agreement, with rare earth minerals and China’s access to technology the focus.
Comments from FOMC officials continued to focus on inflation risks and the latest price data provided justification. Headline consumer prices rose 0.2% in July, consistent with the average pace over the first half and expectations for this release. However, underlying pressures firmed, the core CPI lifting 0.3% in the month – the strongest monthly gain since January. Within the detail, services inflation accelerated to 0.4%mth, led by a sharp 4.0%mth rise in airline fares, alongside firmer prints for recreational, education, and medical services. Core goods inflation was contained at 0.2%, but the pickup in the 6-month annualised pace from 0% in December 2024 to an average of 1.2% in June/July makes clear tariff costs are slowly being passed through. Overnight the producer price detail also highlighted a combination of capacity constraints and tariff passthrough, core goods prices up 0.4% and services 1.1%.
China’s consumer inflation pulse is, in contrast, non-existent, the annual CPI unchanged over the year as producer prices fell 3.6%. Excess industrial capacity and soft consumer demand are the cause of this price weakness and, until supply tightens meaningfully, this trend is likely to remain entrenched. Authorities in China continue to provide incremental support to the consumer, this week through a subsidised consumer credit scheme which has capacity to support a broad array of purchases. But, as made clear by the credit and deposit trends, consumers remain extremely cautious on their finances and are therefore reticent to ramp up discretionary purchases. If confidence in the outlook amongst households does not strengthen, our 4.6% forecast for GDP growth in 2026 is likely to face downside risks. Further detail on our expectations for China can be found in Westpac Economics’ August Market Outlook, due for release later today on Westpac IQ.
Finally, data for the UK this week was constructive. UK GDP beat expectations, gaining 0.3% in Q2 after a strong 0.7% result in Q1. Though the Q2 result was principally due to support from public demand, with household consumption up just 0.1% and investment down 1.1%. The latest labour market data also showed tentative signs of improvement. The unemployment rate held at 4.7% in June, unchanged from the prior month, as employment growth accelerated to a nine-month high of +238k. Together these outcomes suggest a robust flow of new entrants into the labour force in response to robust labour demand. In such circumstances, wage growth is likely to maintain a robust pace, rising 4.8%yr over the three-months to June compared to 4.9%yr in May.
 unanimously decided to cut the cash rate by 25bps, a move that came as no surprise to market participants. This week’s decision chalks up a cumulative 75bps of rate cuts since February, highlighting the MPB’s intent to gradually reduce policy restrictiveness as underlying inflation settles sustainably at the mid-point of the target range. The MPB continued to emphasise a “heightened level of uncertainty”, meaning incoming data will remain critical to the pace at which policy is eased towards neutral.){kind=link}