Key insights from the week that was.
In Australia, the much-anticipated Q2 CPI report came in below our and the market’s expectation. Headline inflation rose 0.6% in Q2, less than half of Q1’s 1.4% gain. This largely reflects a shrinking contribution from auto fuel prices, the temporary halving of the fuel excise tax and falling global oil prices the key drivers. Importantly, underlying trimmed mean inflation also surprised to the downside, the RBA’s preferred quarterly measure up 0.8% (3.6%yr) in Q2, 0.2ppts below their May Statement on Monetary Policy forecast. Two areas that policymakers and analysts were closely watching was housing and market services. Encouragingly, prices in these sectors are now rising at a much less alarming pace, alleviating fears over rapid and/or exaggerated pass-through.
Following the CPI release, Chief Economist Luci Ellis announced that Westpac Economics no longer expects additional rate hikes in 2026, though the Monetary Policy Board (MPB) is likely to hold on to a hawkish posture until risks fully subside. Absent an adverse price risk(s) materialising in the near term, at 4.35% the cash rate is appropriately restrictive to ensure inflation will sustainably return to the midpoint of the target range over the forecast period while prior gains for employment are retained. This capacity will provide the economy with a greater ability to weather future supply shocks, a topic taken up by Chief Economist Luci Ellis in this week’s essay.
Offshore, the FOMC left rates unchanged at their July meeting. Activity was characterised as solid, aided by strong investment and productivity growth, and the labour market broadly balanced. Inflation remains well above target, however, and the Committee is clearly focused on whether recent energy and semiconductor price shocks hold broader significance. Unnerving market participants on the day, it appears the FOMC is not in a rush to determine whether the current stance of policy is appropriate to bring inflation back to target, or indeed if it is better to allow the market to balance expectations and risks by itself. Several months of data and discussion are likely necessary to determine the next step based on economic data alone. However, it is entirely possible risks to inflation, or to the long end of the yield curve, will push the FOMC to a decision sooner. Policy will be live at coming meetings, particularly in September and October, with an on-hold decision most likely, but by a very narrow margin.
US data and the actions of the White House are likely to pose challenges for market participants and the FOMC as they seek to distinguish the most probable path and material risks for the economy through year end. Q2 GDP growth slowed more than expected to 1.5% annualised, although the underlying detail was constructive – consumer spending rebounding strongly after a weak Q1 while business investment held on to its buoyant momentum. A surge in imports offset this momentum, however, highlighting the extent of the US’ reliance on the global production chain. June PCE data provided further reassurance on inflation, core PCE slowing to 0.1% in June. But energy prices remain a significant threat, Brent oil whipsawed between USD82 and USD97 this week as the US and Iran halted then resumed military strikes, and the Houthis and Iran-linked groups in Iraq sought to disrupt energy trade in the region. Communication between the US and Iran is only occurring through intermediaries and their positions on key issues remain far apart.
Policymakers at the Bank of England unsurprisingly continued to highlight risks stemming from the Middle East as they voted to remain on hold in a split decision, the minority of three favouring a 25bp hike. That said, recent data have increased confidence that the domestic disinflation process remains intact, the recent downside surprise for inflation, slower wage growth and softer labour market conditions cited as evidence supportive of a sustainable return to trend. Updated forecasts lowered the inflation profile while modestly upgrading growth expectations, leaving the BoE comfortable remaining on hold for now, albeit with a need to carefully assess the evolving spectrum of risks meeting by meeting.
 in Q2, 0.2ppts below their May Statement on Monetary Policy forecast. Two areas that policymakers and analysts were closely watching was housing and market services. Encouragingly, prices in these sectors are now rising at a much less alarming pace, alleviating fears over rapid and/or exaggerated pass-through.){kind=link}