By Lucinda Jerogin, Associate Economist at CBA
- The Minutes of the July RBA Monetary Policy Board Meeting re-enforced a cautious Board who wanted to wait and see quarterly inflation data before resuming its rate-cutting cycle.
- News offshore was dominated by trade headlines as nations worked to secure deals with the US before the August 1 deadline. Japan and the Philippines made progress, while a deal with the EU remains under negotiation. The ECB kept interest rates on hold, as widely expected.
- Next week, locally all eyes will be on the all-important quarterly CPI ahead of the August RBA Monetary Policy Board meeting. Home prices, building approvals, retail trade, private sector credit and trade prices are also due.
- Abroad, US President Trump’s trade deal deadline looms. Three central banks meet. We expect the FOMC, BoC and BoJ to leave rates on hold. Eurozone and US inflation and GDP figures are also released.
It was a relatively quiet week in global financial markets. Locally, the minutes of the July RBA Monetary Policy Board Meeting headlined proceedings as markets searched for answers on the surprise on hold decision. The Minutes re-enforced a cautious Board who wanted to wait and see quarterly inflation data before reducing the cash rate again.
The cautiousness did not stop there, though. Uncertainty over the restrictiveness of policy also played a role in the hold decision. A large part of the Minutes was dedicated to how to ‘assess’ the neutral rate in Australia. Ultimately, the cash rate was thought to be ‘modestly restrictive’.
The Minutes laid out the debate between leaving the cash rate on hold, or the case to cut. The case to leave the cash rate on hold focussed on the slightly stronger monthly CPI data, stronger than expected private demand in Q1 25, a persistently tight labour market and diminishing global uncertainty.
The forecasts in May were also conditioned on a relatively modest and gradual path of further monetary policy easing over the period ahead. Three rate cuts in four meetings was deemed not a modest and gradual path, and so further patience was seen as prudent.
Also this week, RBA Governor Michelle Bullock spoke on ‘The RBA’s Dual Mandate-Inflation and Employment’ on Thursday. The Governor noted the labour market is performing on track with the RBA’s May Forecasts and did not appear alarmed by the lift in the unemployment rate in June.
Offshore, markets coasted through a quieter global calendar. US tariff news made headlines as the August 1 deadline loomed. President Trump announced new deals with the Philippines, and Japan. The new tariff rate on imports landed at 19% and 15%, respectively. However, Japan’s rate is conditional on a $550bn investment into the US.
In US economic data, initial jobless claims fell by 4k to 217k. Across the Tasman, Q2 2025 CPI came in softer than expected, rising by 0.5%/qtr and 2.7%/yr. Our colleagues at ASB expect annual CPI inflation to push higher above 3%/yr in Q3 2025. However, they anticipate the RBNZ will look through the tick up in near-term inflation as the deteriorating global outlook and the significant spare capacity in the NZ economy dampen medium-term inflation pressures. ASB continue to expect the RBNZ to cut the official cash rate by 25bp to 3.0% in August.
In the world of central banks, the ECB left the deposit rate unchanged at 2% on Thursday. Our international economics team continues to expect two more 25bp rate cuts in September and December.
Other news to note, the team has delayed their expected timing of PBoC easing given its recent hawkish tilt. They now expect the PBoC to cut the 7-day reverse repo rate by 10bp and the reserve requirement ratio by 50bp in Q4 2025.
Turning our attention to the week ahead and the domestic data flow ramps up. The focus will center on the all-important quarterly inflation print. We expect headline CPI rose by 0.8%/qtr in Q2 25, easing the annual rate to 2.2%/yr. The more policy relevant trimmed mean CPI is expected to have increased by 0.7%/qtr which would see the annual rate dip only marginally to 2.8%/yr—but rounding could see a 0.7%/qtr and 2.7% configuration.
Looking to the August RBA Board meeting, our base case remains for a 25bp rate cut given the annual trimmed mean inflation continues to moderate.
Market pricing for an August rate cut is over 100%. But it is not a done deal. We expect another rate cut in November with the risk of an additional cut in early 2026.
Other economic data next week includes home prices, building approvals, retail trade, private sector credit, and trade prices.
Abroad, three major central banks will meet. We expect no change from the FOMC, BoC orBoJ. The US FOMC are expected to leave the Funds rate on hold with Chair Powell reiterating the need for more economic data to assess the inflationary impacts of tariffs.
In Canada, elevated core inflation and trade uncertainty will encourage the BoC to keep its policy rate on hold for longer. Our international economics team next expects the BoC to cut the policy rate by 25bp in October, with a further 25bp cut in Q1 2026.
The Bank of Japan is also expected to leave its policy rate on hold. Financial markets will closely scrutinise the post meeting communication to gauge the BoJ’s appetite for further interest rate hikes.
