It seems it took the Bank of Canada rather than local economic news to see the Australian market embrace the prospect for further interest rate cuts from the RBA – starting in February.
The BoC decided to cut its cash rate to 0.75 per cent despite its dominant trading partner – the United States – recording decent growth and fueling solid demand for Canadian exporters. The collapsing oil price and perception of a too high Canadian dollar forced the BoC’s hand as it looked into 2015 for the risks to growth and inflation which were universally to the downside.
The BoC reasoning for an interest rate cut looks to apply to Australia and our own RBA. Falling terms of trade, weak real economic growth, uncomfortably low inflation and a persistently high currency are all the issues confronting the Australian economy. 2015 looks like a crook year unless policy is relaxed.
What is interesting is the BoC decision occurred despite a strong trend decline in unemployment in recent years – in Australia, unemployment is trending up. As noted, the major market for Canadian exports, the US, is looking its best in many years, while Australia’s major trading partner – China – just recorded its weakest growth rate in more than two decades. The case for lower rates in Australia is looking many times stronger than in Canada.
Then there is the issue of the level of rates – now 0.75 per cent in Canada and a stonkingly high 2.5 per cent for the RBA. Australian interest rates are amongst the highest in the world and if you need a reason to see why the Australian dollar remains too high, look no further.
The Australian economy is mired in a weak growth phase, with record low wages growth, a severe shock from export prices in free-fall and moribund consumer sentiment. Mining investment is falling rapidly and inflation is a dead duck. There seems zero chance that fiscal policy will be used as a driver to reignite growth and job creation.
Which all comes back to the RBA. It meets in less than two weeks and it can do something to address the economic and policy problems confronting the economy with an interest rate cut and a bias signaling that more will be coming.
Lower rates will free up cash flows for households and business, it will discourage savings and therefore support stronger growth and minimise the risk of inflation falling too much as the world lurches towards deflation.
You know it makes sense.