The week that was
The Bank of Canada (akin to our Reserve Bank of Australia) shocked just about everyone with a decision to hike official interest rates for the first time in 7 years. The 25 basis point rate hike took the rate to 0.75 per cent, with the market consensus suggesting the move was based on a more upbeat pace of economic expansion rather than inflation, which continues to track below the BoC target.
The BoC noted “Canada’s economy has been robust, fuelled by household spending… Household spending will likely remain solid in the months ahead, supported by rising employment and wages.”
These fundamentals are quite different to those prevailing in Australia and as such, there appear to be few lessons for the RBA from the BoC move. The Australian economy has been anything but robust with GDP skating near 20 year lows and household spending is soft. And while employment in Australia has been quite strong, wages growth remains at record lows.
As the chart shows, the BoC move put a rocket under the Canadian dollar which hit a 14 month high against the US dollar.
The week ahead
The all important labour force data for June will help verify the robustness of recent data on employment, hours worked and the unemployment rate.
For the last three months, the labour force data have provided pleasant surprises to economy watchers, including at the RBA, which is pinning its hopes on a solid pick-up in economic activity over the remainder of 2017 and into 2018. The general consensus is that a statistical pause is likely with the June data – a flat result for employment and the unemployment rate stalling at 5.5 or 5.6 per cent. Such a result would be respectable, given the recent strength. Any result stronger than this, would get a few more market watchers speculating about an eventual interest rate hike from the RBA.