ABE Weekly: Central Banks Pause, but the Higher-for-Longer Debate Continues

Market Insights

• Australian Labour Market Remains Resilient Ahead of the RBA Meeting
• ECB Holds Rates Steady While Maintaining a Data-Dependent Approach
• China Holds Lending Rates Steady Despite Persistent Growth Concerns
• Asia’s Central Banks Navigate Currency Pressures and Higher Energy Costs

Key Points

• Australia: The RBA left the cash rate unchanged at 4.35% p.a. at its June meeting. May CPI eased to 4.0% p.a., while Trimmed Mean rose to 3.60% p.a. (up from 3.4% p.a. in April).
• United States: The Federal Reserve left the federal funds rate unchanged at 3.50%–3.75% p.a. at its June 2026 meeting. The latest U.S. CPI inflation rate is at 3.5% p.a. in June 2026. Core CPI moderated further to 2.6% p.a.
• United Kingdom: The Bank of England held the Bank Rate steady at 3.75% p.a., and headline CPI for June was 2.6% p.a., down from 2.8% in May. Core inflation was unchanged at 2.6% p.a.
• Eurozone: The European Central Bank left its key deposit facility rate unchanged at 2.25% p.a., and Euro area CPI eased to 2.8% p.a. in June, down from 3.2% p.a. in May.

Here are the latest monetary-policy and inflation figures for key economies:

Australian Labour Market Remains Resilient Ahead of the RBA Meeting

Australia’s latest labour force data showed employment growth remaining exceptionally strong, reinforcing the view that the labour market is proving more resilient than expected. Employment increased by 76,300 people in June, significantly exceeding market expectations, while the unemployment rate remained unchanged at 4.4% and the participation rate rose to 67% (up from 66.7%).

The result, together with an upward revision to May employment growth, suggests labour market conditions remain more resilient than expected despite signs of slower economic activity. However, much of June’s employment growth was in part-time jobs and the underemployment rate increased, indicating some spare capacity continues to emerge.

Why it matters: For fixed income investors, the stronger-than-expected employment outcome reinforces expectations that interest rates may remain higher for longer. While inflation is trending lower, ongoing labour market resilience may limit the scope for near-term easing and keep short-term bond yields elevated. The RBA has emphasised that inflation remains above target and that further policy tightening cannot be ruled out if inflation pressures prove more persistent than expected.

ECB Holds Rates Steady While Maintaining a Data-Dependent Approach

The European Central Bank left policy rates unchanged as expected, reiterating that future decisions will depend on incoming economic data. Although euro area inflation has moderated considerably over the past year, policymakers remain cautious given ongoing services inflation and geopolitical risks affecting energy markets.

The ECB’s cautious stance mirrors that of other major central banks, with policymakers preferring to wait for further confirmation that inflation is sustainably returning to target before considering any meaningful policy adjustments.

Why it matters: Stable European policy settings help anchor global bond markets and reinforce expectations that most developed market central banks are now entering a prolonged period of policy stability rather than further tightening.

China Maintains Policy Support as Markets Await Further Stimulus

The People’s Bank of China (PBoC) left both its one-year and five-year Loan Prime Rates unchanged, a decision that was widely expected by markets. Policymakers continue to favour targeted fiscal measures over broad-based monetary easing as they seek to support economic growth while managing financial stability risks. Although China’s economy continues to face headwinds from weak domestic demand and a subdued property sector, investors are now looking to the upcoming Politburo meeting for signs of additional policy support.

Why it matters: China’s measured policy approach suggests authorities remain focused on supporting growth without significantly increasing financial risks. As Australia’s largest trading partner, China’s economic outlook remains highly significant, with demand for Australian exports influencing domestic economic growth, interest rate expectations, and, ultimately, Australian bond markets.

Asia’s Central Banks Navigate Currency Pressures and Higher Energy Costs

Central banks across Asia remain cautious as higher oil prices and weaker currencies increase the risk that inflation will remain above target. This has reinforced expectations that interest rates are likely to stay higher for longer across much of the region.

In Japan, the yen has weakened further, increasing imported inflation pressures through higher energy costs and fuelling speculation about potential policy adjustments by the Bank of Japan. Elsewhere, policymakers, including in Indonesia, have maintained a relatively cautious stance to support their currencies and contain inflation, even as domestic economic growth slows.

Higher energy prices remain a challenge for many Asian economies that rely heavily on imported oil, including Japan, South Korea and India. While inflation has generally eased across the region, a sustained rise in energy costs could delay further interest rate cuts and extend the period of tighter monetary policy.

Why it matters: Asia’s economic outlook has important implications for global markets and Australia given the region’s role in trade and investment. Japan remains one of the world’s largest bond markets, and any sustained increase in Japanese Government Bond (JGB) yields or shift in Bank of Japan policy could influence global bond markets as Japanese investors adjust their overseas allocations. For Australian investors, weaker regional growth or higher inflation pressures could also affect export demand, commodity prices and the outlook for domestic interest rates.

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