Australian and Indonesian Interest Rate Decisions May Direct Canadian Interest Rates for July 2010

Rate decisions in Australia and Indonesia give indications of the growing storm clouds and worldwide concern for the outlook of the Global Economy as we enter the second half of 2010.

In the past two days both Australia and Indonesia has made decisions to hold interest rates where they are. Both countries Central Banks have cited the high global risks of uncertainty as a result of the European Debt Crisis.

A July 6, 2010 article in the star online indicates that:

Indonesia’s central bank kept its key rate steady at a record low as expected yesterday, as it seeks to spur bank lending and economic growth, and signalled its long-held intention to keep the rate there until next year.

Analysts now say Bank Indonesia (BI) has to start raising rates by the fourth quarter or the first quarter of next year to avoid being behind the curve in controlling inflation, with a July rise in electricity prices to add to growing price pressures.

What is interesting about this statement is that the Indonesian analysts predict that the Central Bank will hold rates firm for the balance of 2010. The concern for the fate of the situation in Europe obviously outweighs concerns for domestic inflation.

Australia also had an eye on Europe and obviously looking to global equity markets when it made its rate decision today to hold rates firm, avoiding any rate increase in the “near term.”

According to a July 6, 2010 Bloomberg Business Week article:

Australia’s central bank paused in raising borrowing costs for a second month, and dropped a reference to the level of its benchmark being appropriate for the “near term,” citing concern about the global outlook.

Stevens joins central bankers in the U.S., Europe and parts of Asia, including Indonesia, in keeping borrowing costs unchanged to gauge whether Europe’s sovereign debt crisis threatens the global economic recovery. The central bank today also said it expects inflation to hold near the top of Stevens’ 2 percent to 3 percent target range over the next year.

“The big downshift in equity markets, and global commodity markets has probably given them pause for thought as to how aggressive they want to be from here,” said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney.

With these rate decisions, both Australia and Indonesia have given clear signals that they feel the current global economic situation is skewed in a more negative direction and it requires a pause in any ambitions to increase interest rates until a clear and meaningful worldwide recovery takes hold.

According to a survey conducted by Bloomberg, Canada’s gross domestic product neither expanded nor contracted in April 2010 compared with 0.6% growth in March. Economists surveyed by Bloomberg had been forecasting 0.2% growth in GDP for April.

Statistics Canada blames the “large decline” in retail trade of 1.7% in April as the basis for the problem.

According to a July 2, 2010 Financial Post article:

Michael Gregory, senior economist with BMO Capital Markets, said that while the 3% growth now expected is respectable, it is a bit of a letdown compared with the 5% to 6% growth figures seen earlier.

“It’s kind of like driving on the highway at 100 kilometres an hour, then getting off and going 50,” he said in an interview. “But 3% growth is still all right and where we see it for this year.”

Warren Jestin, chief economist with Scotia Economics, said in a note on Wednesday that Canada’s position as a resource leader should help keep it afloat in the face of other developed countries, although “this won’t be a hard race to win.”

The situation in Europe is troubling for Mr. Gregory, but he suspects the combination of weakening housing, high unemployment and zero credit growth will hurt the United States.

Even with clear evidence of a slowdown in the Canadian economy, some Canadian Banks are still calling for a rate increase in July.

As Canada’s largest trading partner, the United States economic situation has more bearing on any Canadian rate decision than any circumstance or situation in Europe.

Even with all the economic “Push” the US is giving its economy, the Recovery seems to be dragging its heals and running out of steam. The 2nd half of 2010 will show us the direction ahead.

For now it seems, Canadian Interest Rates must toe the line and hold steady with no increase in July 2010.