Reserve Bank of Australia lowers rates as inflation eases
Executive summary:
- Australia’s central bank cut rates by 25 basis points
- Canadian inflation ticked up during January
- Chinese equities have rallied on investors’ expectations for more stimulus this year
On the latest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, discussed the recent interest rate announcement from the Reserve Bank of Australia (RBA). He also assessed how the latest Canadian inflation data could impact upcoming monetary policy decisions from the Bank of Canada (BoC), and concluded by examining the recent performance of Chinese equities.
RBA cuts rates as price pressures moderate
Lin began with a look at the RBA’s Feb. 18 decision to lower its benchmark lending rate by 25 basis points (bps) to 4.1%. The rate cut was the Australian central bank’s first of the cycle, he said, lagging most other major central banks, which began lowering rates last year. However, despite the later start, Lin said he expects the RBA to still be able to gradually take rates to a more neutral setting as inflation continues to ease.
Following the central bank’s announcement, the Australian Bureau of Statistics released two additional data points that were supportive of the RBA’s decision, Lin noted. The first was a report showing that wage pressures during the fourth quarter of 2024 rose at a softer-than-expected pace, he said. “This was a positive development that suggests that over time, Australian inflation should be able to continue moderating,” Lin remarked.
The second data point was the country’s unemployment rate, which rose slightly to 4.1% in January, he said. Characterising the number as generally in line with consensus expectations, Lin said it suggests that the Australian labour market is softening a bit—but importantly, not at an alarming rate.
Canadian inflation numbers surprise to the upside
Turning to Canada, Lin said that both consumer and producer prices came in somewhat hotter than expected during January. However, he stressed the importance of looking at the country’s overall inflation rate, which currently sits at 2.5% if the BoC’s preferred measure of core inflation is used.
“This number is already within the central bank’s 1%-3% target range—and it’s down significantly from its 2022 peak. In addition, if the BoC’s old measure of core inflation is applied, the annual inflation rate is even lower, at 2.1%,” Lin explained. Amid this backdrop, he said the central bank is likely to be a little more tolerant of a temporary setback in inflation than it would be if the inflation rate were higher.
Lin said that as long as inflation continues to moderate, the BoC should be able to eventually lower interest rates to a neutral setting of 2.75%. Noting that the risks of an economic slowdown in Canada are a little more elevated than in the U.S., he said the BoC could wind up cutting rates even more meaningfully if the country were to tip into a recession. Even if Canada avoids a recession, Lin said it’s still possible the central bank could drop rates below 2.7% later this year due to the country’s weak jobs market and sluggish economic growth.
Noting that markets are pricing in slightly less than a 50% chance of a rate cut at the BoC’s next policy meeting in March, Lin said he thinks the outcome could go either way. “I believe it’s quite possible that the BoC will still cut rates next month—but the decision will probably hinge on what the next labour-market report reveals,” he stated.
What’s helping fuel the rally in Chinese stocks?
Lin wrapped up by unpacking the recent strength in Chinese equities, which he said can be partially attributed to investor expectations for more stimulus this year.
“China will be holding its National People’s Congress meeting in March—and during this meeting, the government is likely to announce its GDP (gross domestic product) growth target for 2025. We think that if a target of around 4.5%-5.0% is announced, more meaningful stimulus will probably be needed,” he explained.
Liin said that because of the recent rally, Chinese equities now appear somewhat overbought, relative to the broader equity market. That said, he noted that Chinese equity valuations still look reasonable and are more attractive than their U.S. counterparts. “With this in mind, we continue to think that having diversified portfolio exposure—including an allocation to China—could be important for investors,” he concluded.