Key insights from the week that was.
This week the RBA took centre stage in Australia deciding unanimously to keep the cash rate unchanged for a second consecutive meeting. As detailed by Chief Economist Luci Ellis, the accompanying statement highlighted that the MPB is prepared to increase the cash rate from here, if upside risks to inflation materialise. This is more specific and narrower language than in May, when it stated that the cash rate would be increased “if needed”.
Headline and trimmed mean inflation have both come in lower than the RBA expected in May, and the labour market and housing market are both weaker than it anticipated. These outcomes have strengthened their assessment that monetary policy is somewhat restrictive, likely sufficiently so to bring inflation below the target range mid-point by 2028. Inflation risks are still regarded as skewed to the upside, however, and the labour market tight. So, we expect the RBA’s communications to maintain a hawkish tone while they remain on hold through late-2026 and early-2027. By August 2027 though, we believe a period of below-trend growth, an unemployment rate above the full employment level and a trend deceleration in annual inflation will be enough to warrant the first of three 25bp rate cuts, to be followed up in November 2027 and February 2028. Until this relief is given, the consumer is likely to remain cautious on spending and housing, topics assessed in depth in our latest Red Book.
On the data front, the July NAB business survey captured businesses’ reaction to the breakdown of the US/Iran Memorandum of Understanding and the brief spike in Brent oil above USD100 per barrel. Business conditions continued to show resilience (+1pt to 4), but confidence remained sub-par, registering a second-consecutive reading of -6 – 11pts below its long-run average and within the bottom 10% of outcomes recorded since 1997. Input cost increases are materially affecting business profitability, particularly in sectors where weak and/or fragile demand is limiting the ability of firms to pass costs on. The survey’s gauge of profitability remained only modestly below its long-run average, and the employment index in line. That said, forward orders showed a 3pt decline in July to -3 highlights a need to monitor risks closely.
Offshore, US inflation data was in focus. Again, it proved benign, headline prices rising 0.1% and 0.2% excluding food and energy. While annual headline inflation is still a multiple of the FOMC’s 2.0%yr target (3.4%yr in July), core inflation has moderated all the way back to 2.5%yr. And recent monthly outcomes suggest further progress is in train. Since December 2025, core goods prices have essentially been flat. Core services inflation has meanwhile averaged 0.3% per month over the period with an outsized contribution from shelter. Indeed, 6-month annualised inflation excluding food, energy and shelter was just 1.6% in July compared to 2.4% for the traditional ex food and energy measure. There is little the FOMC can do about shelter inflation in the short to medium-term, and inflation across the rest of the basket is clearly not suggesting a hike(s) is necessary now or in coming months.
Last Friday’s nonfarm payrolls report also argues in favour of restraint by the FOMC, the employment gauge surprising to the downside in July (-23k) following a -103k revision to the prior two months. Household survey employment was weaker still, with 87k fewer people reporting they are employed in the month, continuing the trend of the past 6 months (an average monthly decline of 153k). Declining participation continues to mask the deterioration in household employment. Had participation not fallen 1.2ppts since January 2025, the unemployment rate would be through 5.0%. Average hourly earnings are increasingly reflecting labour market slack, rising just 0.1% in the month, slowing the annual pace to 3.2%.
All told, we expect the US economy to continue to show resilience, growing around trend in 2026–28. But the household sector is set to remain under considerable pressure, with excess capacity likely to build in the labour market and the ability to unlock housing wealth constrained by borrowing costs and uncertainty. A complete update of our global analysis and forecasts will be made available in our August Market Outlook today on Westpac IQ.
