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Friday, July 17 2015
Canada cuts it rate. Will we follow?

A surprise interest rate cut in Canada and the prospect of a similar move next week in New Zealand have stoked speculation the Reserve Bank of Australia will follow suit later this year.

While the Reserve Bank remains reluctant to cut rates again, the direction taken by two of governor Glenn Stevens' closest global peers helped send the Australian dollar to a six-year low of US73.54¢ on Thursday.

The Bank of Canada's cut its benchmark interest rate to 0.5 per cent on Wednesday. The RBA is expected to sit on its hands for a few more months yet, but it is also hard to see how the underlying terms of trade dynamics and mining capex unwind result in anything but persistent sub-trend growth, stagnant wages, and ultimately a lower cash rate.

Joshua Williamson, a senior economist at Citigroup, noted that the Bank of Canada has justified its cut because its economy faces a "significant and complex adjustment" and is keen to shift Canada's reliance on energy to "non-energy output".

"That sounds very similar to what's happening here in Australia," he said, alluding to the Reserve Bank's repeated call for more "non-resources" economic growth.

The Bank of Canada, like its Aussie and Kiwi counterparts, also signalled that it believes the need for greater macroeconomic stimulus should take precedence over financial stability.

Citigroup expects the Reserve Bank to remain on hold next month but cut the official cash rate from its current record low of 2 per cent to 1.75 per cent in November.

"What hopefully we'll see come our summer is that the US recovery has enabled the Fed to tighten, that's lifting the US dollar, that's helping other people depreciate and the rest of the world to ride on the US economy's coat-tails."

Posted by: Greg Carroll AT 02:32 pm   |  Permalink   |  Email