The Bank of Canada on Wednesday did what would have been unthinkable a few short months ago, hiking interest rates for the first time in seven years, and paving the way for other central banks to do the same.
Its statement cited stronger consumer spending as well as rising employment and wages, though governor Stephen Poloz said the country’s low inflation remained puzzling.
The BoC’s abrupt turnaround from fence-sitter to rate hiker strengthens the recent hawkish tilt of most central banks in advanced economies, and follow the US Fed, the Bank of England and the European Central Bank all signalling their intentions to tighten monetary policy.
Capital Economics believes the US is likely to be the next to raise rates – having already done so twice this year – with the Bank of England likely to follow next year. The European Central Bank is likely to focus on reducing its balance sheet this year and the next, and is expected to raise rates in 2019 – though investors are awaiting a speech to be given by ECB president Mario Draghi next month at the annual Jackson Hole conference, which could speed up the rate hike path ahead of its September 7 meeting.
The globally coordinated nature of central bank movements – with some notable exceptions like the Reserve Bank of Australia and the Swiss National Bank – is unlikely to be formally planned. But it does make it easier for hawkish banks to raise rates.
“Different central banks’ actions may well reinforce each other, in part because central banks’ hawkishness in the presence of other hawkish central banks would moderate the foreign exchange impact,” noted Citi’s global economics team in a note to clients on Thursday.
“Central banks are also learning from others’ experiences, including that financial conditions remained benign in the US despite several Fed rate hikes.”
The Reserve Bank is an outlier in this scheme.
At a glance, the Canadian economy has a lot in common with Australia’s. It is mining-dependent, and in the grips of a housing boom, which has caused international ratings agencies to downgrade the credit ratings of Canada’s banks.
But the similarities are superficial, argued Deutsche Bank’s chief economist Adam Boyton. “Not only are the commodity baskets different, but the major trading partners are too,” he wrote on Friday, adding that the differences in the unemployment rate between Canada and Australia likely explained the different monetary stance.
The RBA has broadly mirrored global interest rate policy in recent years, but rarely have its movements been as dramatic as those overseas. It didn’t lower interest rates as aggressively during the global financial crisis, and was one of the first to begin raising rates again in 2010, noted Capital Economics’ chief global economist Andrew Kenningham. It began to lower them again in December 2011, and has held them at record lows since August last year despite several US rate hikes.
One of the reasons the RBA is happy to keep rates on hold currently is likely because, as it has repeatedly pointed out, a weaker currency would be beneficial to Australia’s post-mining-boom economic adjustment. If Australia’s traditionally high interest rates move near or below those of other advanced economies, the dollar is likely to weaken.
“The RBA recently maintained its neutral guidance, stating that the current stance of policy was consistent with sustainable economic growth and achieving the inflation target over time, against some market expectations of more hawkishness. We continue to expect no change in the cash rate this year and well into next year, as the RBA grapples with high household debt and the desire to contain the value of the Aussie dollar to support a return to trend growth and to full employment,” Citi’s economists wrote.
It’s a similar story with the Swiss National Bank, they noted, which sees the Swiss Franc as overvalued and has vowed to remain active in currency markets to lower the currency. “Political risks in the Eurozone or elsewhere can easily reignite upward pressure on the Swiss Franc,” they wrote.