By Lucinda Jerogin, Associate Economist at CBA
- The RBA cut the cash rate by 25bp to 3.60% in a unanimous decision and was widely expected.
- The Wage Price Index printed broadly in line with expectations, rising by 0.8%/qtr in Q2 25 to be 3.4% higher annually.
- The unemployment rate retreated to 4.2% in July.
- The CommBank Household Spending Insights index lifted by 0.8% in July, the tenth consecutive month of gains.
- Offshore, the hotly anticipated US CPI failed to challenge a 100% priced September Fed cut.
- The week ahead is quieter locally with the release of the WBC/MI consumer sentiment and the S&P Global Composite PMI. Abroad, markets will focus on trade news and the FOMC Meeting Minutes. In New Zealand the RBNZ meets.
There was something for everyone in the world of global financial markets this week with a steady flow of economic data, monetary policy board meetings and world news.
On Tuesday, the RBA cut the cash rate by 25bp to 3.60% as widely expected. Money markets were 100% priced and all economists surveyed by Bloomberg predicted a cut.
The decision was unanimous by the Board and Governor Bullock noted in her press conference there was no discussion of a larger cut. The statement read like a Board that was comfortable with the current state and outlook for inflation. This was a shift since the May and July meetings.
The lingering risks appear to be gone. Inflation is moderating and forecasts show “underlying inflation will continue to moderate to around the midpoint of the 2-3% range, with the cash rate assumed to follow a gradual easing path”.
The RBA’s updated economic forecasts did not see major changes in August. The most notable was a downward revision to assumed labour productivity growth from ~1.0%/yr to ~0.7%/yr. This mechanically lowers the estimate of potential growth to just ~2.0%/yr. As a result, the RBA also downwardly revised their GDP forecasts.
Another update was the lowering of the assumed cash rate profile. This was set to hit 2.9% in December 2026 and settle at 3.1% by December 2027. We expect another 25bp cut in November to take the cash rate to 3.35%.
The next RBA meeting is held on 29-30 September. The timing of the next rate cut could shift with the data flow. However, it would take a material weakening, particularly in the labour market, to bring a September cut into play, given the RBA’s implied preference for a cautious and gradual easing cycle. The key data releases in our view will be the August and September labour force survey and the Q2 GDP data.
Data released this week did little to shift our thinking. The Wage Price Index eased to 0.8%/qtr in Q2 25 from 0.9%/qtr in Q1 25. The annual rate of growth held steady at 3.4%/yr.
Wage gains look narrower, and our CBA wage tracker is pointing towards further moderations in Q3 25. This should allay any lingering fears for the RBA around unsustainable wages growth. In fact, the statement hinted at more of a concern around the labour market rather than inflation.
The July labour force survey printed broadly as expected and confirmed a gradual loosening. Employment rose by 24.5k and the unemployment rate edged lower to 4.2%, in line with expectations. The participation rate remained at 67.0%.
In our view, the current level of slack in the labour market is not a material risk to inflation, particularly given we expect wages growth to soften from here.
Also this week, our CommBank Household Spending Insights index recorded a solid 0.8% increase in July, from an upwardly revised 0.5% lift in June. We noted in the June release that there had been signs of more consistent spending growth over the last five months. This trend continued in July, reinforcing our view that there are signs of life in consumer spending.
Other data releases included new housing lending and overseas arrivals. New housing lending printed slightly softer than expected, rising by 2.0% in Q2 25 to be 7.2% higher annually.
A pickup in housing market momentum and lower interest rates are supporting lending. However, the full impact of rate cuts is yet to be seen.
Offshore, the hotly anticipated US CPI failed to challenge a 100% priced September Fed cut. But a stronger than expected PPI saw markets pare back pricing to ~90%.
Both headline and core PPI rose +0.9%/mth suggesting tariff impacts have thus far been borne by producers, with pass through to consumer prices yet to be fully realised.
In our international team’s view, the Fed may want to wait for the initial tariff-induced spike to pass before considering rate cuts. They expect the Fed to next cut the Funds rate in October.
The week ahead is much quieter locally. Economic releases are ‘soft’ data in the form of the August WBC/MI consumer sentiment and S&P Global Composite PMI.
The consumer sentiment survey will pick up the reaction to the RBA’s August rate cut. Abroad, markets will focus on the release of the July FOMC Meeting Minutes. The RBNZ meets on Wednesday. Our colleagues at ASB expect the RBNZ to cut the OCR by 25bp to 3.00%.
