Head to Head: RBA Versus BoC

The Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) began their interest rate announcements similarly enough. They both expressed concern about the global economy and how the European debt crisis may spread and dampen growth worldwide. But that’s pretty much where their similarities ended, because while the RBA took the plunge and decided to cut its rates from 4.50% to 4.25%, the BoC stayed cool on the sidelines and kept rates steady at 1.00%.

Optimistic BoC

The fact that the BoC decided to hold its rates at 1.00% wasn’t surprising. The big shocker was how optimistic it sounded when it released its official statement. Unlike other major central banks which had recently made dovish announcements, the BoC noted that growth in the second half of 2011 is actually coming in stronger than it had anticipated back in October.

Not only has business investment been as solid as a rock, but household spending has been building quite a lot of momentum as well. Just in time for the holidays, too!

Not-so-optimistic RBA

In contrast, the RBA had a little more nitpicking to do when it gave its feedback on the Australian economy. According to RBA Governor Glenn Stevens, trade activity has already peaked and will likely slip in the months to come.

Also, I noticed a hint of concern when Stevens brought up the fact that labor market conditions have softened in recent months. After all, the unemployment rate, which is currently at 5.2%, has picked up quite a bit from its midyear levels at 4.9%.

As if that wasn’t bad enough, he warned that the outlook for growth could be bogged down because households have been more cautious about spending in recent months. Remember, retail sales only clocked in a 0.2% growth in October, just half the figure that economists had predicted!

Taking different paths with inflation

Another major difference between the two central banks is their current situation with regards to inflation.

The Canadian CPI has come out higher-than-expected for the last three months. On a year-on-year basis, Canadian inflation is hovering at around 2.9%, just below the BoC’s upper target limit of 3.0%.

Meanwhile, recent data has pointed to weaker inflation in Australia. The TD Securities- Melbourne Institute monthly inflation index fell 0.1% in November. This helped bring the annual rate down from 2.6% in October to just 2.1% in November, its lowest level in 20 months.

Remember, price stability is one of the key factors that central banks take into account before making any interest rate changes. With lower inflationary pressures, the RBA has a lot more leeway to be cutting interest rates than its Canadian counterpart.

Looking ahead, even though the BoC held rates this time around, I don’t think we can completely write off the possibility of a rate cut over the next few months. With the European debt crisis still unresolved and the U.S. looking at a sluggish recovery, Canadian exports may take a hit to start the year, leaving the BoC with no choice but to cut rates in order to help stimulate the economy.

In the same manner, the fact that the RBA cut rates this month doesn’t mean that we should rule out a rate cut in January. Remember, the RBA has been known to react swiftly to current market conditions. Not only did it cut rates 5 months in a row from 2008 to 2009, but it was also the first central bank to raise rates when we started seeing signs of improvement across the globe.

The bottom line is that with the global economy still wrapped in uncertainty, there remains significant risks to both Canada and Australia. So don’t be surprised if we see a few more rate cuts to start 2012!