Key insights from the week that was.
In Australia, all eyes were on the May Labour Force Survey amid an otherwise quiet domestic calendar. In the event, the level of employment edged slightly lower following last month’s surge, falling by –2.5k in May. While this was on the softer side of expectations, it is worth highlighting that the current trend for employment growth remains stable and robust at a three-month average pace of 2.3%yr, unchanged from five months ago and a strong result versus history.
This modest decline in employment was met with a slight pull-back in the participation rate to 67.0%, allowing the unemployment rate to hold steady at 4.1% for a fourth consecutive month, marking around a year-and-a-half of readings at or slightly above 4.0%. Emphasising the current resilience in labour demand, average hours worked rebounded back towards its long-run trend following prior disruptions, aiding a continued modest downtrend in the underemployment rate.
This latest reading is unlikely to shift the dial for the RBA who consider the labour market tight relative to full employment. Overall, we remain comfortable with our view that the RBA’s next rate cut is most likely to occur in August. The Board is cognisant of the downside risks to global and domestic growth. But the RBA have made it clear they want to adjust policy in a cautious and predictable manner, warranting another quarterly reading on inflation and time to assess global conditions before the balance of risks is re-evaluated.
Across the Tasman, New Zealand GDP rose by 0.8% in the March quarter, slightly ahead of market forecasts, albeit not as broad based as anticipated. With the economy regaining its footing sooner than expected after last year’s sharp downturn, our NZ economics team continue to expect the RBNZ to take the opportunity to pause and assess at its July OCR review.
Further afield, the US FOMC kept rates steady at their June meeting, believing a reactive approach to policy is prudent. Broadly, the FOMC remain positive on the health of the US economy, a view based on the underlying pulse in private final demand to abstract from trade volatility. The Committee’s median GDP forecast was revised down from 1.7%yr to 1.4%yr in 2025 and from 1.8%yr to 1.6%yr in 2026, reflecting the impact on confidence and economic activity of the Administration’s trade policies. Still, the revised forecasts are only marginally below the FOMC’s estimate of trend growth (1.8%yr), and the unemployment rate is expected to peak around 4.5%, just above the full employment level of 4.2%.
On inflation, the FOMC are clear that someone will eventually have to pay for the tariffs, and it is most likely to be the US consumer. Still, the net impact on consumer inflation is seen as modest and short lived. Annual headline and core inflation is forecast to top out around 3.0% at end-2025 then decelerate quickly back towards target, to 2.4%yr in 2026 and 2.1%yr come 2027. The full range of forecasts from Committee members points to a greater degree of apprehension over the risks for inflation than economic activity and employment. The top-of-range forecast for core inflation is 3.5%yr in 2025 and around 3.0%yr in 2026 and 2027. These are outcomes that would require monetary policy to remain restrictive throughout this period instead of returning to neutral as per the Committee’s median view.
We continue to see downside risks to growth and employment compared to the FOMC’s expectations, forecasting GDP growth of 0.9%yr,1.0%yr and 1.5%yr in 2025–2027 and a sustained lift in the unemployment rate to 4.8%. But we also expect to see more persistent inflation pressures and risks in 2026 and 2027, more as a result of supply constraints than delayed tariff effects. In our view, it is therefore most probable that the FOMC will be on hold at a mildly contractionary level of 3.875% in 2026 and 2027 after two 25bp cuts in H2 2025.
The Bank of England’s Monetary Policy Committee also kept Bank Rate unchanged at 4.25% in June. Six committee members supported the decision, while three members voted for a 25bp cut. The minutes revealed the majority view was supported by the recent pickup in inflation, which is expected to persist in the second half of the year. Meanwhile, those in favour of lowering Bank Rate emphasized the further loosening in labour market conditions. Indeed, the whole committee acknowledged that, together with weak underlying GDP growth, the labour market is pointing to a margin of slack opening up over time. While pay growth is moderating as a result, the committee are yet to be convinced it is dampening consumer inflation.
The MPC continued to assess that risks to inflation are two-sided, particularly given the recent increase in energy prices and “heightened unpredictability in the economic and geopolitical environment”. The MPC’s forward guidance was left unchanged, emphasising “a gradual and careful approach to the further withdrawal of monetary policy restraint”. To date, this approach has been consistent with a 25bp cut per quarter, a pace we believe will be maintained through the remainder of 2025, with the next 25bp cut coming in August after further evidence of moderating pay growth.
In Japan, the Bank of Japan held the policy rate steady at 0.5% and announced its purchase of Japanese Government Bonds (JGBs) through March 2027. The pace of purchases will be reduced by ¥200bn per quarter from June quarter 2026 to March quarter 2027 compared to the ¥400bn per quarter reduction outlined in last year’s plan and in place until March quarter 2026. The messaging around tapering was consistent with the 2024 statement: the BoJ is prepared to intervene should long-term interest rates rise sharply, and will amend the plan at subsequent meetings if necessary.
To provide greater liquidity to the market, there were two changes to the Securities Lending Facility. These include broadening the bonds available for lending to 10-year JGBs maturing after 2031, and continuing to lend from its balance sheet until outstanding bonds (i.e. those not owned by the BoJ) to reach ¥1.5trn (previously ¥1.2trn) – changes that likely come as a result of feedback from market participants.
The Committee continues to describe financial conditions as ‘accommodative’ and believes achieving their inflation target in the medium-term remains probable. Though, given global uncertainty, we maintain the BoJ will wait until the March 2026 RENGO decision before raising rates again – continued robust wage growth and passthrough to inflation warranting taking the next step.
Finally to China. Signs of improving confidence and effective policy were evident in the latest consumption data, retail sales growth accelerating from 5.1%yr in April to 6.4%yr in May (5.0%ytd) mostly as a result of discretionary spending. However, there was no such improvement in the property market, new and existing home prices falling in May, respectively -0.2% and -0.5%, and property investment still down 10.7%ytd. Industrial production continues to carry solid momentum, 6.3%ytd, and new capacity is being invested in, with total fixed asset investment up 3.7%ytd despite the drag from the property sector. Authorities 5.0% growth target for 2025 remains readily achievable. Though to ward off downside risks for 2026, gains need to be made in housing.
