The Bank of Canada just cut interest rates. Will the RBA follow suit?

ASX 200 investors are hoping the RBA will follow the Bank of Canada and cut interest rates. But will it?

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S&P/ASX 200 Index (ASX: XJO) investors hoping for interest rate relief from the Reserve Bank of Australia are eyeing the overnight announcement from the Bank of Canada.

In a move that was widely expected, the Bank of Canada cut the nation's official interest rate by 0.25%, bringing it down to 4.75% from the prior 5.00%.

That sees the Canadian rate 0.75% below the upper band of the official US Federal funds rate of 5.25% to 5.50%. This has some market watchers concerned it could pressure the Canadian dollar, with the Fed not expected to begin easing until late 2024 or early 2025.

While the Canadian dollar did slip 0.4% against the US greenback following the announcement, the foreign exchange moves have been muted so far.

Asked about the divergence with US rates, Bank of Canada governor Tiff Macklem said the central bank's policies didn't need to align with the US Fed. He added that if inflation continued to fall, more interest rate cuts could be expected.

"I don't think we're close to that limit," Macklem said (quoted by Bloomberg). "There's no sort of bright line, and you can see from history there have been periods of considerable divergence."

Will this help the RBA pivot to interest rate cuts?

At 4.35%, Australia's official cash rate has trailed that set by most developed central banks.

That could influence the RBA to keep rates on hold a little longer than most.

However, like Canada, the RBA will predominantly focus on the domestic situation. And, as we reported yesterday, Australia's sluggish GDP growth over the March quarter has upped the odds ASX 200 investors will see some interest rate relief this year.

Carolyn Rogers, senior deputy governor at the Bank of Canada, noted that while central banks faced similar inflationary issues when they were raising rates, they face economic differences now that they're approaching the easing cycle.

According to Rogers (quoted by Bloomberg):

Although we were quite coordinated on the way up, and that was really helpful because a big part of inflation was global, you're going to see some divergence on the way down and that makes sense.

Doug Porter, chief economist at the Bank of Montreal, said that Canada's interest rate cut could encourage other central banks, like the RBA, to follow suit rather than wait for the Fed to begin easing.

According to Porter:

There is safety in numbers. If central banks see their counterparts heading that way, that gives them some comfort that they're not completely misreading the situation. I think it does make it easier for other central banks to start cutting too.

After closing up 0.4% yesterday, the ASX 200 is up 0.8% in early afternoon trade today.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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