Rate Cut Not the End! Global Trade Uncertainty Persists as Australian Domestic Consumption Emerges as Key Variable

Data shows Australia's inflation has significantly retreated from its 2022 peak. In the June quarter, the trimmed mean inflation rate—a key measure of underlying inflation—fell to 2.7% year-on-year, broadly in line with market expectations. The headline inflation rate, affected by temporary cost-of-living subsidies, stood at 2.1%, also matching forecasts. The Reserve Bank of Australia (RBA) updated its projections, indicating that if interest rates are adjusted gradually, underlying inflation is expected to move closer to the midpoint of the 2%-3% target range in the future.

Australia's domestic economy presents a mixed picture: On one hand, private demand is gradually recovering, supported by rising real household incomes and looser financial conditions. On the other hand, businesses widely report weak demand limiting their pricing power, with some sectors facing profit pressures. Although the labor market has softened slightly (unemployment rose to 4.3% in June), it remains tight, with high job vacancies and wage growth slowing from its peak. However, low productivity has kept unit labor costs elevated.

The RBA warned of dual risks in household consumption. If income growth fails to sustain confidence, consumption may underperform, dragging down overall demand. Conversely, wealth effects combined with improved real incomes could trigger stronger-than-expected spending. Both scenarios would significantly impact the economic growth trajectory.

Globally, while U.S. tariff policies and other nations' responses have yet to cause extreme disruptions, uncertainty in trade policies continues to pose downside risks to economic activity. The RBA noted that businesses and households may delay spending until conditions stabilize, and this cautious sentiment is already affecting Australia's economy. The central bank emphasized that monetary policy is well-prepared to act decisively if international shocks materially impact domestic activity and inflation.

The rate cut decision reflects the RBA's confidence in the disinflation trend but also reveals concerns about economic resilience. The RBA's statement reiterated that maintaining price stability and full employment remains its top priority, with future decisions highly data-dependent, closely monitoring global economic conditions, financial market movements, domestic demand trends, and labor market developments.