Welcome to Bendigo Bank’s monthly update for August, with our forecasts and views on global markets and the domestic economic outlook.
Today we’ll look at: the latest inflation and jobs numbers, the path ahead for the RBA official cash rate, and how stock markets and the US economy are evolving with the most recent tariff announcements.
A month on from the RBA surprising the markets by keeping rates on hold in July, insisting that they wanted more evidence of moderating inflation, and we’ve seen nothing but confirmation that inflation is at (or below) its target of 2 ½ %, and that the risks of any rebound in underlying inflation have receded further.
As outlined on our business insights website, we assessed a July cut as a 2 in 3 probability and still only expect one RBA rate cut per quarter, but the cautious RBA decision was a surprise.
Since then the jump in unemployment to 4.3%, together with the low, benign read for second quarter CPI do suggest the RBA would have been vindicated in cutting rates last month, with CPI down to 2.1% and the Trimmed Mean just under 0.6% for Q2… annualised that would equate to 2.36 % core inflation, below the target of 2 ½%- and as the chart shows, the share of the CPI basket with prices rising above target is down to only 35%.
All of this suggests the RBA may need to cut rates with a little more urgency, and a 35-basis point cut to 3.5% would be a neat compromise - but as a base case, our forecasts continue to predict quarterly cuts down to a neutral level around 3 ¼ % by February next year.
The decision on August 12th therefore appears to be just a matter of how large a cut will be delivered, with markets fully pricing in a 25 basis point cut to 3.6%, but the main arguments against larger cuts are the consistent messaging from the RBA for patience in adjusting monetary policy, and the latest household spending numbers, where both discretionary and essential spending edged higher… but still at a relatively tame pace.
Households and small businesses are still in need of interest rate relief as they claw back the impacts of the inflation shock from 2022-24, and as we continue to deal with a highly complex and uncertain global backdrop.
The latest US data seems to be confirming what all economists and central banks have been warning… that (despite the size of US tariffs only now averaging around 17%, vs 27% on ‘liberation day’ in early April) the tariffs risk slowing down the US economy and adding to US inflation; so the latest US jobs data … with its sharp fall in non-farm payrolls and downward revisions to previous months suggests that the US unemployment rate is about to rise as the economy adjusts to tariffs and immigration policy.
Normally this would see the Federal Reserve cut rates in response, which is now quite plausible in September; but the latest US inflation data and uncertainty about its path ahead makes this a much tougher call.
Meanwhile stock markets have been volatile digesting these complex conditions,
but continue to shrug off the short term worries and trade near record highs as
AI promises to be the catch-all solution.
In summary, global conditions remains highly challenging and uncertain, although our lower tariff rate of 10% is a welcome outcome on a relative basis, and more progress with moderating inflation leaves us with one less thing to worry about - so if we are right that the RBA cut rates twice more this year and potentially again in February, the clouds should continue to clear.
And that’s the market update from Bendigo Bank.
