Economic Update - June 2026

With the war in the Middle East petering out and after three rate rises this year, the RBA is feeling much better about inflation and its ability to deal with whatever comes next. Warsh put his stamp on the FOMC, and June marks ten years since the Brexit vote. 

What happened in Australia?

As expected, the RBA kept interest rates on hold in June. After three-consecutive rate rises, the RBA is happy to sit on the dock of the bay and watch the impact of past interest rate rises lag away. Despite ongoing uncertainty in the Middle East, the RBA is finally feeling good about where monetary policy is at.

“We are in a better position than we were at the beginning of the year when interest rates were three-quarters of a percentage point lower.” Michele Bullock, monetary policy decisions - media conference, 16 June 2026.

While consumer sentiment fell 2.9% to 80.6 in June, Australian consumers kept spending, much like their counterparts in the US. After falling in April because of the steep rise in fuel prices, household spending rebounded by 1.3% in May on a monthly basis. March-quarter GDP grew 0.3% compared to the previous quarter, down from 0.9%, but it was private demand driving the growth (see chart below).

Headline inflation continued to slowly fall in May, but the RBA’s preferred inflation measure, the trimmed-mean, continued to slowly rise (see chart below).

The RBA is hoping that as consumer demand falls as interest rates bite, underlying domestic inflation dissipates, and that the trimmed-mean will fall. Headline inflation is jumping around even more than normal because of the swings in the price of fuel.

What happened around the world?

USA

At his first FOMC as chair, new Fed Chair Kevin Warsh kept rates unchanged. However, he was also quick to let everyone know his commitment to bringing inflation back down to around 2%. It turns out that Warsh’s first FOMC meeting was not the expected cage fight against hawkish committee members. This would have disappointed Trump, but has delighted markets.

“We have the capability and commitment to deliver on our price-stability objective

of 2 percent. That’s exactly what we’re going to do. … Inflation is a choice.” Kevin Warsh.

A week after the meeting, the PCE for May showed an increase from 3.8% to 4.1%, on an annual basis. However, Warsh’s supposed preferred inflation measure, trimmed-mean PCE, actually fell (see chart below). We will need to know more about the Warsh Fed before we can know what indicators to focus on.   

Warsh says maximising employment remains a target, but for now, reducing inflation is the priority.

US nonfarm payrolls surprised on the upside in May with 172,000 new jobs. It was the third consecutive month of strong jobs’ growth (see chart below). This gives Warsh more space to focus on inflation.  

At his media conference, Warsh also explained that the Fed will go back to the future in terms of communication. He wants markets to react to hard data rather than relying on “too much” guidance from the Fed. We all remember the days of guessing the meaning behind each of former Alan Greenspan’s few words with joy - God rest his soul!

Warsh, however, was happy to talk about all the little committees he has set up to precipitate change at the Fed. This includes looking at the Fed’s balance sheet, improving data sources, and improving data collection.  

The war in the Middle East has entered a new phase. There is still a lot of uncertainty over the final negotiated outcome, but the oil price has returned to near pre-war levels.

The Trump administration unveiled a new tariff tool during the month; the stated aim is to encourage trading partners to get tougher on imports produced with forced labour. The US still has a lot of work to do itself in this space. The new tariffs range from 10% to 12.5% and could come into force as early as July. Expect the validity of these tariffs to be challenged in court.  

China

The outlook for China’s manufacturing improved slightly in June with the official PMI increasing slightly (see chart below).

However, overall, data still points to a two-speed economy with slow domestic demand but strong exports (see chart below).

EU

The ECB raised interest rates by 25 bps in June, citing the impact of the war in the Middle East.

“The war in the Middle East is generating inflation pressures, and the decision to raise rates is robust across a range of scenarios mapping out how the shock might evolve and affect the medium-term outlook for the euro area.” ECM monetary policy decision.

The 0.2% fall in GDP in the March quarter compared to the previous quarter did not stay the ECB’s hand (see chart below). Instead, the ECB believes it is now better placed to help the euro area economy if it slows further.

The end of the month brought some welcome news, with inflation falling from 3.2% in May to 2.8% in June.

Japan

The BoJ raised interest rates to 1% in June; a 31-year high. The BoJ cited increased inflation risks while arguing that financial conditions were still accommodative after the increase.

Despite the increase, the yen continued to weaken against the USD during the month (see chart below). This mostly reflects markets now believing that US interest rates could soon go up.

UK

Inflation remained unchanged at 2.8% in May despite increased price pressures from fuel. The BoE kept interest rates steady.

June marked 10 years since the Brexit vote. The world has changed a lot since then, and the then catch-cry of “Singapore on the Thames” now seems anachronistic. Most economists argue that Britain’s economy has suffered because of Brexit.

New Zealand

GDP increased by 0.8% in the March quarter compared to the previous quarter, marking three consecutive quarters of growth (see chart below).

What this means for Australian Private Debt

While the UK has not become Singapore by the Thames, Australia remains an economic force in the Asia Pacific! The Australian consumer remains resilient, but the RBA is feeling confident that it has wrestled domestic inflationary pressures into the corner.