July’s inflation reading came in hot

The main domestic economic developments this week included the release of the Minutes for the 11-12 August 2025 meeting of the RBA’s Monetary Policy Board (MPB) and the publication of a surprisingly strong Monthly Consumer Price Index (CPI) Indicator for July 2025.

The RBA Minutes depicted a MPB feeling broadly comfortable that the economy is tracking in line with the central bank’s forecasts. On that basis, they report that the MPB judges that further modest policy easing will still be required to return the cash rate to a more neutral setting consistent with the central bank’s twin objectives of returning inflation sustainably to target and maintaining full employment. At the same time, the Board remains unsure as to the appropriate pace of that easing, in part due to the volatile external environment but also because of uncertainties around the prevailing degree of labour market slack and the implications for ongoing inflationary pressures in the economy. That in turn implies continuing caution, data-dependency, and a careful meeting-by-meeting approach to policy setting from here, in line with our previous post-meeting assessment.

In that context, the latest monthly read on inflation will have reinforced the MPB’s cautious approach, with the Monthly CPI Indicator rising by an unexpectedly strong 2.8 per cent over the year to July. The market had expected that the headline rate would nudge up from June’s subdued 1.9 per cent reading, due to the impact of expiring electricity rebates, but had pencilled in a more moderate 2.3 per cent rate. While we know that the RBA is inclined to place limited weight on the CPI Indicator (a complete monthly measure of the CPI will be published from November this year), given that the July readings on underlying inflation also came in hot, at this stage Martin Place seems unlikely to be in a rush to resume rate cuts when the next MPB meeting rolls around on 29-30 September.

Sticking with central banks but moving further afield, the focus of much of the international financial press this week has been on developments at the US Federal Reserve. Ordinarily at this time of year, Fed-related coverage would involve dissecting the implications of the Fed Chair’s speech at the Jackson Hole conference, which this year involved an update on the US central bank’s evolving monetary policy framework. And there were noteworthy changes to be found here. For example, the Fed has decided to remove language indicating that the effective lower bound (ELB) is a defining feature of the economic landscape. Similarly, it has decided to eliminate the ‘makeup’ strategy of allowing an intentional moderate inflation overshoot to offset a previous period of inflation undershoot. In Powell’s words, this commitment has ‘proved irrelevant’ in the aftermath of the post-pandemic inflationary breakout. All of which tells us something interesting about how the Fed now sees the contemporary inflation environment. But attention has instead been captured by the escalating conflict between the Trump administration and the central bank, where the administration is now seeking to fire one of the Fed’s board of governors. At the time of writing, it was still too soon to tell how this latest showdown will play out, although thereare already concerns about the potential implications for interest rates and borrowing costs. Here, it is worth reminding readers once again of our piece a few weeks back on the rising risk of fiscal dominance.

Below we dig into the MPB minutes and the monthly inflation numbers in more detail and provide our regular linkage roundup which includes the aftermath of last week’s Economic Reform Roundtable. As usual, the accompanying charts are available in the web version.

Finally, a note to say that the Weekly economic update is about to go on an extended break due to a mix of travel, family commitments, and holiday. It won’t be back in your inboxes until 3rd October, I’m afraid, and I apologise for the extended absence of your regular economics fix.

MPB Minutes suggest further easing ahead, but at an uncertain pace

The RBA published the Minutes of the 11-12 August Monetary Policy Board (MPB) meeting, at which board members voted unanimously for a 25bp cut in the cash rate target. According to the Minutes:

‘Members agreed that the information received since the previous meeting had provided the further support that they had been seeking for the judgement that inflation was heading sustainably towards the midpoint of the target range. Members observed that the staff forecasts were consistent with the Board achieving its inflation and full employment objectives over the medium term, conditional on reducing the cash rate at this meeting and somewhat further thereafter. However, there were plausible risks to these forecasts in both directions. Members unanimously agreed that these considerations formed a strong case for lowering the cash rate target by 25 basis points at this meeting.'

The Minutes also cover the MPB’s ruminations on the future trajectory of the cash rate, where the MPB thinks that further policy easing will be required. There is no direct guidance at to how many more rate cuts that might involve, although the judgment that current policy is ‘slightly restrictive’ suggests that the current level of the cash rate target is now not too far away from neutral. The Minutes do note that this decision will be data-driven and take place on a meeting-by-meeting basis:

‘Members agreed that – based on what they knew at the time of the meeting – preserving full employment while bringing inflation sustainably back to the midpoint of the target range appeared likely to require some further reduction in the cash rate over the coming year. They also agreed that it was important for the pace of decline in the cash rate to be determined by the incoming data on a meeting-by-meeting basis.’

In terms of the likely pace of any further policy easing, the Minutes rehearse the case for a gradual approach, listing several considerations:

‘…various indicators suggested that labour market conditions remained a little tight, and the forecast for inflation was for it to be marginally above the midpoint of the target range in the medium term. In addition, private demand was showing signs of recovering, with risks on both sides of the forecast. And uncertainty about the degree of spare capacity and the neutral interest rate could warrant a measured approach to assess what incoming information reveals about these and other uncertainties.’

But they then go on to acknowledge the case for a ‘slightly faster reduction in the cash rate over the coming year’ than currently envisioned:

‘…such an approach would be appropriate if the labour market turned out already to be in balance. In such circumstances, maintaining a slightly restrictive stance of monetary policy could result in inflation undershooting the midpoint of the target range as excess capacity emerged in the labour market. A slightly faster reduction would also be appropriate if the overall balance of risks to the forecasts became more clearly skewed to the downside, perhaps because of adverse developments in the global economy or the anticipated handover from non-market sector to market sector employment growth not proceeding smoothly.’

So, the policy outlook continues to be conditioned on some familiar risks, including the ‘true’ state of spare capacity in the labour market (or equivalently, the ‘true’ level of ‘full employment’) and ongoing uncertainties around the global economic outlook. Regarding the former, for example, the Minutes report ‘members noted that, as the economy approaches balance, it was becoming more challenging to determine if there was spare capacity in the labour market.’ And in terms of the global picture, they comment that after taking lags into account, ‘any effects of increased trade policy uncertainty on spending were expected to become evident only from late 2025 and, even then, were expected to be modest.’

Finally, as to which of these two approaches to the pace of policy easing is more likely? The MPB does not feel able to make a call just yet:

‘Members agreed that it was not yet possible to judge between these alternative scenarios for the pace of future reduction in the cash rate, given the prevailing uncertainties.’

July’s Monthly CPI Indicator surprised to the upside

The ABS said that the Monthly Consumer Price Index (CPI) Indicator rose 2.8 per cent over the year to July 2025. That was up sharply from June’s 1.9 per cent annual increase as well as considerably stronger than the market consensus forecast, which had anticipated a 2.3 per cent print. It also marks the highest year-on-year result for the CPI Indicator since last July’s 3.5 per cent outcome.