Canada cuts rates, who else will follow?

Canada cut interest rates overnight from 5.00% to 4.75%. I’ve been keeping a close eye on Canada because of its similarities to Australia. Rates rose more than Australia over the past couple of years and are coming off a higher base, so we must keep that in context.

Australia’s cash rate is still lower than Canada.

Despite this, rates are being pulled back because inflation is now under control and the Bank of Canada is now worried about growth next year. Australia is probably 4-6 months behind the Canadians and Europeans, who are also likely to see rate cuts this week.

Aussie inflation is still too high above 3% which makes it hard for the RBA to talk rate cuts. However, what’s more important to me is economic growth. Aussie GDP was just 0.1% for the last quarter, an absolute disaster considering our population growth and exposing to commodity prices which bounced back after the pandemic.

There’s no doubt the Australian economy is starting to choke with higher rates. Inflation will trend lower here too over the next six months, as it has in Canada, as job losses start to gather steam and things slow down even further.

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Bottom line: Retail is weak, GDP growth is none existent and the job market is starting to turn with unemployment back above 4%. These are all essential ingredients for the RBA to consider over the next few months when setting rates. I’m sticking to my view that Aussie rate cuts are likely end of 2024/early 2025.

Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.