Quarterly trimmed mean inflation tracking at 0.6%–0.7%, so inflation is within target. RBA likely to continue reducing monetary restrictiveness, including by cutting the cash rate at its August meeting.
- The RBA Monetary Policy Board (MPB) in July opted to wait for more confirmation that inflation is on track to return to the midpoint of the 2–3% target range and stay there. That confirmation has now come with the full June quarter CPI data.
- We therefore expect the MPB to cut rates by 25bps at its August meeting, to 3.6%. Further cuts in November, February 2026 and May 2026, also look increasingly likely.
- Today’s data removes any awkwardness posed by inflation remaining too high for the RBA’s comfort, at the same time that the labour market might be starting to ease again. RBA Governor Bullock understandably downplayed the pick-up in unemployment in the month of June, given the volatility in the data. Further softening in the labour market would sit uncomfortably with a decision to hold the cash rate at restrictive levels when underlying inflation is so close to target.
Normally, monetary policy decisions should not come down to a single number tipping the balance. Monetary policy affects the economy with a lag and thus needs to be forward-looking. This time around, though, as in several recent quarters, the latest read for underlying inflation has been material for the RBA MPB’s upcoming decision.
Today’s trimmed mean inflation data came in close to what the RBA wanted to see. The outcome was 0.6%qtr, 2.7%yr versus 0.55%qtr (we believe) and 2.6%yr published in the RBA’s May forecasts. (Our own forecast, confirmed in Westpac Senior Economist Justin Smirk’s note earlier this week, was a ‘skinny’ 0.7%qtr, with downside risk, so the outcome was just a shade below our expectations.) Quarterly reads in the ‘sixes and sevens’ puts underlying inflation squarely inside the RBA’s 2–3%yr target range and is consistent with monetary policy no longer needing to be restrictive.
We therefore believe that the MPB now has the confirmation it needs to continue on its ‘cautious’ – if not so predictable last month – path of removing current monetary restrictiveness.
Accordingly, we expect the RBA to cut the cash rate by 25bps at its August meeting in a couple of weeks to 3.6%. With the internal members likely switching their votes from hold to cut, we expect the external members who voted to hold in July will also switch to a vote to cut, leading to a unanimous decision.
We suspect that today’s data will come as something of a relief to the RBA. By cementing the inflation case to cut, it removes any awkwardness around the signs of a renewed softening in the labour market, which would otherwise conflict with its response to inflation risks. RBA Governor Bullock downplayed the pick-up in unemployment in the month of June, rightly emphasising that one should never get hung up on one monthly read of a volatile series. The increase also took the quarterly average unemployment rate exactly in line with the RBA’s May forecast for June quarter. If, however, the RBA were to keep the cash rate on hold again in August, only to see further softening in the labour market in the July data released two days after the meeting, it would complicate its strategy and communication.
If we are correct that the RBA MPB does cut in August, the path from there also looks increasingly likely to line up with our current forecast of cuts in November, then February and May 2026. Assuming our expectations are borne out, that would take the cash rate to a trough of 2.85%. We think this is at the lower end of what could be regarded as neutral, and would reflect the RBA’s response to a path for underlying inflation that turns out a little lower than what it forecast in May.
We will have a little more colour on the RBA’s interpretation of these inflation data tomorrow, with Deputy Governor Andrew Hauser speaking in the morning. Consistent with the new practice for a MPB that is meant to be more independent than the previous Board was (wrongly) perceived to be, the Governor and Deputy Governor will not give guidance in public appearances between meetings. That would front-run the meeting and pre-empt the MPB’s decision. We could, however, learn more about how the RBA staff are seeing the data and whether the ongoing disinflation revealed in today’s data is expected to continue.
