Bendigo Bank's July Economic Update

Our Chief Economist’s EOFY report card for the Aussie economy

As the new financial year kicks off, Bendigo Bank’s Chief Economist David Robertson issues his latest report card on the economy, outlining:

• cash rate cut firms for next week
• trade wars and military wars fail to dampen stock market
• labour markets remain resilient
• AUD rallies against weakening USD

Cash rate cut expected next week

With inflation getting back on track in FY25, Mr Robertson said the RBA appears “very likely” to cut rates next week to 3.6%.

“Australia’s CPI fell to 2.1% in the May monthly indicator, and even core measures such as the trimmed mean fell to below the 2.5% target, their lowest level since 2021. So inflation appears back under control,” Mr Robertson said.

The recently-released sluggish retail sales data also added to the likelihood of a cut next week.

Strong employment to stem falling cash rate

The full quarterly inflation numbers for Q2, to be released later this month, will feed into the timing of the next cash rate cut after the likely drop on July 8, Mr Robertson said.

“The next rate cut after July (to 3.35%) may not be until November, but the path back to more neutral rates does appear on track.”

However, with employment still sitting at stronger levels than pre-pandemic, a drop below a neutral cash rate is unlikely, Mr Robertson said.

“One of the reasons we probably won’t go below a neutral cash rate of around 3.1%, is resilient labour markets, with unemployment at 4.1% still much lower today than pre-pandemic back in 2019, and its average rate through that decade of 5.5%, and similarly record lows for underemployment.”

While he still expects slightly higher unemployment ahead, Mr Robertson said “nationally, Australia is outperforming its economic peers.”

Financial markets weather trade and military storms

It has been a tumultuous six months, but local markets appear to be riding out the various geopolitical storms, Mr Robertson said.

“The new financial year kicks off with stock markets back at record highs, despite trade wars and military wars still capturing the headlines,” he said.

“Financial markets are looking at the bright side of further increases to public spending, the promise of AI and other emerging technologies boosting revenues, and moderating inflation allowing more rate cuts ahead.”

Aussie dollar rallies as US dollar weakens

The Aussie dollar has rallied against a weakening US dollar and is now around 4 cents higher than the start of 2025, Mr Robertson said.

“This rally matches our forecasts of a path back to around 70 cents by early next year, but still with significant volatility expected. Our assumption of a weaker US dollar ahead lies with the expectation that US tariffs risk stagflation - or at best ‘slowflation’ - and recent US data clearly shows the slowdown in their economy, although not yet the expected jump for US inflation.”

The productivity problem

As we enter a new financial year, productivity will be the key short-term challenge, Mr Robertson said.

“The global backdrop remains highly challenging although our lower direct exposure to US tariffs should translate to relative outperformance, and recent progress with moderating inflation will be very beneficial for Australia’s economy, leaving our underperforming productivity rate the primary challenge in the short term.”