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An overvalued currency, lower commodity prices and cooling investment in the mining sector. These things are not just happening in Canada, they’re also dealing a blow to Australia, which surprised markets by cutting its key interest rate in an effort to bolster its economy.
The Reserve Bank of Australia cut its benchmark rate to a record low of 2.75 per cent Tuesday, citing rising unemployment, “below trend” economic growth and resource-sector investment that’s poised to cool. And it didn’t mince words about the Australian dollar, which it suggests is too strong. As its natural resource sector slows, the central bank is aiming to give a lift to consumer spending and factories.
Canada’s economy is often compared with Australia’s. Both countries are heavily reliant on commodity exports, have triple-A credit ratings and strong currencies. They have similar levels of wealth, as measured by GDP per capita, and relatively small populations spread over a huge land mass.
But though Australia’s rate cut will be closely watched by Canada’s incoming central bank governor, Stephen Poloz, that doesn’t mean this country’s monetary policy will follow suit.
“The fact that Australia’s economy is struggling does typically mean that Canada’s economy will also slow, because we have similar exposures,” said David Doyle, North American economist and Canadian strategist at Macquarie Securities Group. However, “there are nuances … and Canada’s policy arc won’t necessarily be the same.”
In recent years, while Canada’s central bank was keeping interest rates near record lows – a stance that spurred a housing boom and caused household debt levels to soar – Australia was hiking rates. Those increases eventually cooled its real-estate market and curbed spending, which allowed Australians to boost their savings.
That adjustment has yet to happen in Canada. House prices are still lofty and household debt at record levels, above that of the United States, Britain and Australia.
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