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Canada Cuts Rates, No Hope For Australia

ADH Staff WriterJune 6, 2024
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The Bank of Canada’s recent decision to cut the interest rate by 25 basis points to 4.75 per cent aligns with expectations, reflecting growing confidence that inflation is trending back towards the 2 per cent target from a peak of 8.1 per cent. Governor Tiff Macklem expressed optimism that further rate cuts might be on the horizon if inflation continues to decrease as anticipated.

“The recent inflation report in Canada was slightly better than expected, which is notably ahead of similar measures for the Federal Reserve and the Reserve Bank of Australia (RBA),” noted Mr. Miller, highlighting Canada’s aggressive approach to rate increases and consistent messaging on inflation. This stance has allowed Canada to outperform the Fed and the RBA in managing inflation.

Mr. Miller asserted that the global context of interest rate hikes is now stabilizing, suggesting that the phase of aggressive rate increases is subsiding. In Australia, however, a significant revision in GDP data revealed stronger economic momentum than initially thought, complicating the prospects for rate cuts by the RBA this year.

The unexpected revision in Australia’s GDP data prompted traders to push back the timing of the RBA’s anticipated first rate cut to July, compared to earlier expectations of May. There is even a slight chance of another rate increase. Tom Kennedy, a senior economist at JPMorgan, emphasized that the revised data indicated greater resilience in the economy and household finances, with household consumption being a key component of GDP.

Kennedy pointed out that the RBA’s recent minutes had emphasized the importance of weak consumption in their decision to hold rates steady rather than implement a hike. In contrast, Canada’s central bank is seeing more sustained evidence of easing underlying inflation, leading Governor Macklem to suggest that monetary policy need not be overly restrictive.

Macklem stressed the importance of balancing the policy rate to avoid being excessively restrictive, which could hamper progress in curbing inflation. “If we lower our policy interest rate too quickly, we could jeopardize the progress we’ve made,” he warned, underscoring the delicate balance central banks must maintain to support economic stability while managing inflation effectively.

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