When the Bank of Canada, Canada’s central bank, announced that it would start tapering its quantitative easing (QE) on the 21st of April, they became the first central bank from a developed economy to announce changes their QE program. As part of their announcement, they also announced that they had brought forward the expected timeline for the tightening of monetary policy, moving expectations of a rise in interest rates to the second half of 2022 instead of 2023.
When this was announced, eyes turned to the RBA and speculation that the RBA could follow suit increased due to similarities between the countries. Ultimately, the RBA decided to keep current policies in place and maintain guidance on interest rate increases, though the question still remains – why is a country on the opposite side of the Pacific Ocean the best country to compare to Australia?
Historical and Geographical Similarities
Both countries are former colonies of the United Kingdom and retain the British monarchy to this day, as part of a constitutional monarchy. They are both significant members of the Commonwealth and Canada and Australia were federated in similar ways.
Australia is sometimes referred to as ‘the Great Southland’ which has large inhospitable areas while Canada is referred to as ‘the Great North’, and also has inhospitable areas, even if the climate of the two nations stands in stark contrast.
Population Density Similarities
Both Australia and Canada have low population densities at 3.4/km2 and 3.9/km2 respectively, which puts the countries in the 10 least sparsely sovereign countries in the world. This, however, does not paint an accurate picture of overall population demographics in either country. 64% of Australians live in the 5 largest cities while 45% of Canadians live in the 6 largest metropolitan areas, which stands in stark contrast to Canada’s southern neighbour, with the America’s 5 largest cities only accounting for 5.7% of the population of the United States.
These high population densities mean that the housing prices are high in major cities with the likes of Sydney, Melbourne, Toronto, and Vancouver regularly appearing on lists of the expensive places to live. Just as Australian cities struggled with an overheating housing market in the late 2010’s, so too did Canadian cities as growing populations and slow housing supply growth caused housing prices to rise. High demand in Sydney and Vancouver was even driven by the same factor, with geographic closeness with China meaning that demand from Chinese investors was high.
Reliance on Similar Industries
Mining, manufacturing, and agriculture account for a large portion of each countries GDP, with these industries accounting for 21.5% of Australian GDP and 21.8% of Canadian GDP. Commodity exports are important for both countries with Australia a large player in iron ore, coal, natural gas, oil, gold, and copper exports, while Canada has some of the worlds largest oil reserves and is also an important coal and iron ore miner.
While Australia derives more of its income from mining and has access to a broader range of commodities, Canada is more reliant on manufacturing, and has significant exports of machinery, cars, and equipment, unlike Australia.
Both countries use a currency called the dollar, having adopted the new name moving away from the British pound. Both countries decided to adopt a new currency in order to have a decimalised currency, and while the reasons for the usage of the term ‘dollar’ instead of ‘pound’ is somewhat unclear (especially after ‘Australian Royal’ was the unpopular original choice), it was likely adopted to differentiate the new currency with the old currency, and to align themselves closer with America.
The two countries dollars are generally similar in value to each other, with the Canadian dollar usually slightly more expensive (1 AUD currently buys 1.05 CAD). The similarity in value stems from both countries having similar exports and similar drivers. The value relative to each other fluctuating the most when a commodity that a particular country specializes experiences increased/decreased demand.
Australia’s Big 4 are similar to Canada’s Big 5 in terms of lending practices, with the big banks of each country far more conservative in terms of domestic lending than banks in the US and Europe. After the global financial crisis caused new financial regulations to be introduced. in an attempt to ensure that a similar crisis couldn’t happen again, the Big 4 and Big 5 were much better placed to take advantage of new banking landscape, than in many other developed economies.
Will the RBA Follow the BoC Soon?
While the RBA resisted the opportunity to follow the BoC at their May meeting, it doesn’t seem likely that the RBA will bring forward its timeline for interest rate rises soon and is also likely to keep its QE measures in place for quite some time longer than initially expected. The decision made by the BoC was in response to a hot housing market which has risen 17% in the past year – in contrast, Australian housing prices have only risen 6% in the last year, which gives the RBA less incentive to follow Canada’s example.