James Knightley, Senior Economist at ING, suggests that future Australian rate cuts are looking less likely, but the potential for cuts from New Zealand and Canada remain – the latter being more likely but nothing is expected this week though.
Key Quotes
“Last week’s Reserve Bank of Australia (RBA) left the cash rate unchanged at 2%, stating that while the commodity-based part of the Australian economy continues to struggle, the non-resource sector is performing well. Consequently, the RBA is of the view that there are “reasonable prospects for continued growth in the economy, with inflation close to target.”
The RBA could yet come in with more stimulus given that “low inflation could provide scope for easier policy, should that be appropriate to lend support to demand”. On balance though, we don’t think it will be required and forecast stable rates through to mid-2017. Nonetheless this requires the Chinese stimulus efforts to start generating a more positive outlook on demand.
This week it is the turn of the Reserve Bank of New Zealand (RBNZ) and the Bank of Canada (BoC). Neither are expected to cut interest rates this week – there are just 2 out of 17 economists expecting a move this week in New Zealand while no-one expects a change in Canada. In terms of New Zealand, the RBNZ suggested in late January that “some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range”.
Since then the unemployment rate has fallen sharply, trade has improved, milk prices have risen and business surveys have strengthened although confidence has weakened. Add in the improvement in market sentiment and relative stability in the New Zealand dollar and we see little need for imminent RBNZ action. Indeed, we expect stable RBNZ policy for the next twelve months, but suggest that the RBNZ is more likely to ease than the Reserve Bank of Australia.
Canada is more likely to cut its policy rate than either the RBNZ or the RBA. Indeed, we think that there is a strong chance of a 2Q16 rate cut. Admittedly, the Bank of Canada’s policy statement from 20 January wasn’t particularly dovish, but with the resource sector struggling, retail sales falling and unemployment edging higher in an environment where the Canadian dollar has been strengthening suggests that the BoC are likely to be more open to the idea of a rate cut. Consequently, we expect it to take a more dovish view of things in this week’s statement.”
(Market News Provided by FXstreet)