Reserve Bank of Australia Less Likely to Cut than Bank of Canada

The Reserve Bank of Australia is expected to maintain the current 2.00% rate setting in the near term, as they appear comfortable with the growth and inflation outlook for Australia’s economy following the 50 basis points in total easing implemented this year. But with commodity prices under assault and persistent uncertainty surrounding China’s growth outlook, pressure on the bank to add additional stimulus may intensify in coming months.

The price backdrop through the first half of 2015 supports no change in current ultra-accommodative policy. CPI accelerated to a 1.5% year over year rate in Q2 from the 1.3% year over year clip in Q1. Total CPI has run below 2.0% since Q4 of 2014, which notched a 1.7% growth rate. The trimmed mean CPI grew at a 2.2% year over year pace in Q2 after the 2.3% rate in Q1. The weighted median CPI expanded at a 2.4% year over year rate in Q2 following the revised 2.5% clip in Q1. The relative stability of the core CPI measures over the past four quarters makes determining if the RBA will cut again difficult.

Steady policy would contrast with the Bank of Canada, which blinked this month and cut its policy rate 25 basis points to 0.50%. With both countries facing similar challenges, ongoing comparisons are sure to persist. Interestingly, Canada has the improving U.S. as an eventual offset to the negative impact of the oil shock on its domestic economy. Australia, in contrast, is tied closely to the fortunes of China. And while China’s government has added stimulus, the outlook remains for slower growth that will continue to weigh on Australia’s exports. Moreover, Australia’s rate setting at 2.00% is further from zero than the BoC’s 0.50%, providing the RBA with more leeway to move rates lower. Yet an extremely dovish Bank of Canada contrasts with a more constructive near term outlook at the RBA, leaving what we view as significantly greater chance for a BoC rate cut before year-end.

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