Key insights from the week that was.
Amid a sparse local data calendar, a speech from RBA Assistant Governor (Economic) Sarah Hunter was scrutinised but had little market impact. The speech focused on supply-side shocks, such as the Middle East conflict, and the conundrum it presents for dual-mandated central banks like the RBA.
Assistant Governor Hunter reiterated the RBA’s perspective that these shocks are harder to ‘look through’ if economic capacity is already tight when the shock occurs, firms can readily pass through costs and/or inflation expectations de-anchor. While the latter is more of a risk than a reality at present, the RBA’s take on recent data suggests concern over capacity and pass-through is warranted, particularly in the construction sector. This is why the Monetary Policy Board telegraphed in its June policy decision that rate hikes remain on the table despite their decision to pause at that meeting following three successive hikes. The future scale and pace of tightening will depend on how the risks around each of these factors evolves in coming months. The upcoming Q2 CPI will prove critical in understanding the best course.
In New Zealand, the RBNZ delivered a 25bp increase at their July meeting, taking the cash rate (OCR) to 2.50%. A key argument for the hike was concern that financial conditions would have eased further if the OCR was left unchanged. The MPC seems to be comfortable with an end-2026 level for the OCR circa 2.75%-3.00% – broadly in line with the May forecasts. Our New Zealand economics team expects follow-up 25bp hikes in September and December and an unchanged sequence of 25bp increases through 2027. That means the peak OCR of 4.00% will now be reached in September 2027 instead of December.
Across in the US, the minutes of the June FOMC meeting showed participants felt a high degree of uncertainty over the outlook and wanted to consider a broad range of incoming information over successive months before determining if policy needs to be adjusted. Remaining on hold and removing previous forward guidance which favoured additional easing from the statement were consensus opinions.
On the balance of risks, the discussion amongst members points to a majority view that price risks had risen and labour market uncertainties receded since April. However, following June’s decision, energy prices jolted lower and nonfarm payrolls growth moderated again. The disconnect between payrolls and household survey employment also continues to grow, the latter in outright decline. Growth in consumer demand is also materially below trend and looks set to remain soft, limiting the ability of firms to pass through cost increases.
Still, price risks remain. Midweek, President Trump stated he believed the ceasefire with Iran was “over” but did not stop negotiators from continuing to engage. This followed strikes on around 80 Iranian military targets by the US in response to 3 ships being hit by projectiles in the Strait. Another 90 sites were hit in a second day of strikes, and Iran retaliated against US military assets in the region on both occasions.
President Trump has made clear he intends to order additional strikes in scale every time Iran threatens shipping on the Omani side of the Strait, which Iran has done to force shipping through the lanes it controls. A renewed blockade of Iranian cargo was also threatened by President Trump, with a view to increasing domestic pressure and restricting Iran’s ability to sell oil into global markets. However, President Trump also felt this escalation would prove short lived. Brent oil rose close to USD81 initially but has since eased back to around USD76. This compares to a low of USD71 early in the week.
Data received in the US and elsewhere in the northern hemisphere this week was secondary in significance and broadly in line with recent trends. Most notable was the ISM services index which reported a deterioration in new orders but also a pairing of input price pressures and improvement in employment, albeit for the latter only to near the 20-year average after three successive contractionary readings.
China’s headline and core inflation rates meanwhile stabilised around 1.0%yr in June as producer price inflation edged up to 4.1%yr. Weak domestic demand continues to limit Chinese firms’ ability to pass through higher production costs, which have primarily been driven by energy prices. Excess capacity and cautious consumers are likely to restrict consumer inflation in the absence of targeted (and effective) fiscal support.
 Sarah Hunter was scrutinised but had little market impact. The speech focused on supply-side shocks, such as the Middle East conflict, and the conundrum it presents for dual-mandated central banks like the RBA.){kind=link}