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Is Australia Just Lagging the Canadian Policy Tightening Party?

Canada’s decision to raise interest rates overnight to 1 percent raises questions about whether there’s guidance to be found for Australia, given the similarities between the resource-rich former British colonies.

Both are transitioning to non-resource business investment, exports are solid and their housing markets are moderating. Australia’s jobs market is even outperforming Canada’s, notes Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. The key difference: the outlook for household spending and the trajectories for growth.

“There is ongoing downward pressure on Australian wages given the elevated currency, which is contributing to the need to be more competitive,” Ong said. “And we expect greater divergence in major trading partner growth next year, with a likely moderation in Chinese activity in 2018 in contrast to an expected pickup in U.S. GDP to 3 percent.”

Australia’s household debt is at eye-watering levels, wages are stagnant and utility prices are rocketing, constraining discretionary spending. Throw in a higher Aussie dollar making life harder for exporters and import-competing industries, and the Reserve Bank of Australia is likely to be on hold at 1.5 percent for an extended period -- it’s already been 13 months.

In contrast, Ong says, the Bank of Canada’s October meeting is likely to deliver an upgrade to GDP forecasts, confirm a closing in the output gap and point to further hikes ahead. “Our BoC forecasts are currently under review, with upside risk to our end-2018 forecast of 1.5 percent implying a further narrowing in the RBA-BoC differential,” she said.

In other words, no pointers to be found from Canada.

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