In the latest iteration of global central banks moving towards rate reductions, the Bank of Canada (BoC) announced a 50 basis points (bps) rate cut overnight, taking the policy rate to 3.75 per cent.
The move follows successive 25 bp reductions at the bank’s previous three meetings, with the BoC acknowledging further policy reductions are on the cards if the economy evolves broadly in line with its latest forecast.
This comes as inflation looks to be comfortably within the target range with headline inflation at 1.6 per cent and trimmed-mean inflation at 2.4 per cent.
And while inflation in Australia is predicted to be headed in the right direction – despite a warning from the International Monetary Fund that it could pick up to 3.6 per cent next year – the Reserve Bank is not expected to follow the path of the BoC in the near term.
While rate cuts overseas give wind to those applying pressure on the RBA, GSFM investment specialist Stephen Miller explained that “there are enough differences between the Australian and Canadian economic environments and central bank practice that caution against the drawing of too much by way of parallels”.
In a recent market note, Miller said: “Where the RBA has differed from other developed country central banks, including the Bank of Canada, is that it has shown a reluctance to raise rates as far and as fast.
“The consequence of a relatively lower policy interest rate in Australia has been relatively better labour market outcomes.”
The downside, however, has been relatively “stickier inflation”.
“A reasonable forecast for annual Australian trimmed-mean inflation for the September quarter is around 3.5 per cent. In Canada, the annual trimmed-mean CPI increased just 2.4 per cent,” Miller said.
“And what that suggests is that in Australia, policy rate adjustments on the downside will lag those in other developed countries.”
Economic developments since the RBA’s last meeting in September, he said, have “by and large vindicated the RBA ‘experiment’ of adopting a more cautious approach than its developed country peers in raising the policy rate”.
“Such an ‘experiment’ was aimed at mimimising any dislocation in the labour market. Last week’s strong labour market report affirms that objective is being met,” Miller said, but cautioned that that comes at the cost of a more elongated return of inflation to target.
“Nevertheless, the RBA board acknowledges a risk that the ‘pickup [in household spending] is slower than expected, resulting in continued subdued output growth and a sharper deterioration in the labour market’. There is, as yet no evidence of that ‘sharper deterioration in the labour market’,” Miller said.
“Nevertheless, such a deterioration is a non-trivial risk and one to which the RBA would certainly respond.”
In his view, the RBA may soon be in a position to see some light at the end of the tunnel on inflation.
“If, as I suspect, labour market outcomes and inflation outcomes will be broadly in line with RBA forecasts, then the RBA might reasonably expect to cut rates in February,” he said.
Earlier this week, the IMF said Australia’s inflation will drop to 3 per cent by the end of 2024, aided by subsidies like energy rebates, before rising again to 3.6 per cent by the close of 2025.
This contrasts with the Reserve Bank’s projections, which anticipate inflation falling within its target range of 2–3 per cent by late 2025 and approaching the midpoint of the band by 2026.
Speaking to InvestorDaily on the matter, Miller said he takes it “with a grain of salt”.
“I’d much prefer to believe the RBA forecasts,” Miller said, pointing out that the IMF’s predictions reflect headline inflation, which includes the impact of subsidies.
“The reacceleration looks a little curious … As far as monetary policy is concerned, the most important are the trimmed mean outcomes in any case and I don’t have much cause to disagree with the RBA forecasts.”
