RBA & BoC Worried About Trump’s Policies

The RBA held its cash rate steady at 4.35% for the ninth consecutive month but signaled potential rate cuts in early 2025 amid slowing growth and easing inflation. Meanwhile, the BoC implemented its fifth rate cut since June, slashing its benchmark rate by 50 basis points to 3.25%, as it grapples with rising unemployment and uncertainty surrounding President-elect Trump’s proposed trade tariffs.

RBA Holds Rates Steady in December but Signals Potential Cuts in Early 2025

The Reserve Bank of Australia (RBA) has decided to keep the cash rate unchanged at 4.35% during its December meeting, marking the ninth consecutive month at this level.

This decision comes despite Australia’s economy recording its weakest annual growth rate in decades—outside of the pandemic—during the September quarter, with GDP growing just +0.3% for the quarter and +0.8% over the year. Inflation has also fallen to its lowest level since July 2021, at 2.1%.

While maintaining rates at a 13-year high, first reached in November 2023, the RBA has signaled a greater willingness to consider easing monetary policy in a shift from its previous stance (maybe as early as February 2025.

This marks a significant departure from the RBA’s November communication, which emphasized vigilance against inflation risks and avoided committing to any specific course of action, stating it was “not ruling anything in or out.”

But as the Reserve Bank could be prepared to implement a more accommodative monetary policy in the coming year, Deputy Governor Andrew Hauser addressed concerns about the potential economic implications of Trump’s proposed trade tariffs, specifically the heightened risk of a trade war between the United States and China.

Such a conflict could have significant ramifications for the Australian economy, potentially impacting both economic growth and inflationary pressures.

Evolving Language Signals a Policy Pivot

In its post-meeting statement, the RBA noted that inflation, while still above its target range, continues to decline from its 2022 peak. Importantly, the central bank expressed growing confidence that inflation is moving sustainably towards its target, stating: “The board is gaining some confidence that inflation is moving sustainably towards target.”

This shift in tone represents a more dovish outlook compared to the cautious rhetoric in November. The abandonment of phrases like “not ruling anything in or out” underscores a pivot in focus—from inflation risks to broader economic challenges, such as slowing growth and strained household finances.

Mortgage holders and businesses, who have faced significant financial pressure from 13 rate hikes between May 2022 and November 2023, may find some relief if rate cuts materialize.

Market Expectations

Australia’s economic outlook remains fragile. The September quarter revealed the weakest GDP growth in decades, while rising debt repayments have reached a record share of household income. Although inflation is easing, persistently high borrowing costs have suppressed consumer spending and business investment.

Against this backdrop, market participants have increasingly priced in the likelihood of monetary easing in early 2024. Current market expectations assign a 63% probability of a 25-basis-point rate cut in February. Analysts also foresee additional cuts through the first half of the year, with May being a potential timeline for further easing.

Traders should keep an eye on key factors that could shape the RBA’s decision, such as inflation data, labor market trends, global monetary policies and Trump’s presidency.

If rate cuts materialize, sectors such as housing, retail, and equities are likely to benefit from improved liquidity and consumer confidence. On the currency front, the AUD/USD may face downward pressure as expectations of further rate reductions weigh on the Australian Dollar. The strengthening US Dollar also negatively impacted the currency pair. The dollar’s ascent has been a major market development in 2024, and given President-elect Trump’s proposed “America First” agenda, this trend is expected to continue into 2025.

Always remember that the pace and extent of these rate cuts will hinge on how inflation, growth, and global economic dynamics evolve over the coming months. Traders should therefore closely monitor developments across key domestic indicators and international trends as they prepare for a potentially volatile year ahead.

AUD/USD Weekly Technical Outlook

BoC Slashes Rates Again Amid Growth Concerns

The Bank of Canada (BoC) delivered a 50-basis-point rate cut on Wednesday, lowering its benchmark interest rate to 3.25%. This marked the second consecutive large cut and the fifth reduction since June, underscoring the central bank’s aggressive efforts to combat rising unemployment and sluggish economic growth.

This latest move, widely anticipated by economists and analysts, seems to reflect a growing need for monetary policy to stimulate an economy weighed down by weak domestic activity and external uncertainty.

The decision also coincides with new mortgage rules released by the Office of the Superintendent of Financial Institutions (OSFI). These rules aim to ease borrowing challenges for renewers, switchers, and first-time homebuyers, potentially amplifying the impact of lower rates on the housing market.

Potential Reasons Behind the Bank of Canada’s Move

In its statement on Wednesday, the BoC cited several factors behind its decision to reduce rates.

“With inflation around 2 per cent, the economy in excess supply, and recent indicators tilted towards softer growth than projected, the Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3 per cent target range.”

Governor Tiff Macklem emphasized that while monetary policy has already eased “substantially,” the current environment of sluggish growth and economic slack calls for further stimulus.

Canada‘s unemployment rate rose to 6.8% in November, up from 6.5%, marking the highest level since January 2017 (excluding the pandemic). Meanwhile, economic growth remains subdued. Statistics Canada reported a 1% annualized growth rate for the third quarter, driven primarily by higher government spending rather than private sector contributions.

Trump’s Trade Threats Add Uncertainty

Beyond domestic challenges, the Bank of Canada is contending with heightened risks from its largest trading partner, the United States. The incoming administration of President-elect Donald Trump has proposed imposing 25% tariffs on all Canadian imports, a move that could severely disrupt Canada’s export-dependent economy. The central bank acknowledged this uncertainty in its statement.

Governor Macklem elaborated, saying, “No one knows how this will play out in the months ahead—whether tariffs will be imposed, whether exemptions will be agreed, or whether retaliatory measures will be put in place.” Economists warn that if Trump follows through with his threats, the resulting trade tensions could further weaken Canada’s already fragile growth trajectory.

What’s Next for Borrowing Costs?

Given the challenging economic environment, economists widely expect the Bank of Canada to lower borrowing costs even further in the coming months. Additional rate cuts could help counteract the effects of slower domestic growth and mitigate the impact of potential U.S. trade barriers.

However, the effectiveness of further monetary easing will depend on how external factors, such as U.S. trade policy, unfold. Canada’s heavy reliance on U.S. trade—more than 75% of its exports go to its southern neighbor—means that Trump’s proposed tariffs could significantly dampen economic activity, regardless of domestic stimulus efforts.

For now, the Bank of Canada appears committed to supporting the economy through monetary stimulus, but the long-term trajectory will depend heavily on both domestic resilience and external stability. Key factors to keep an eye on should be trade developments from the US, the labor market trends and global economic conditions.

USD/CAD Weekly Technical Outlook

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