Iron Ore Price Drop Fuels Interest Rate Cut 1

Tuesday, March 31st, 2015
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Sliding iron ore prices and the still-too-high Australian dollar are fuelling expectations that the Reserve Bank will be forced to cut interest rates next week.

The market is now pricing in a 70 per cent chance of a 25 basis point cut when the RBA board meets on April 7, after the price of iron ore slumped to $US52.90 a tonne overnight – its lowest level since records began in 2008.

The dramatic moves dragged the Australian dollar almost one US cent lower toward the 76 US cent level.

It also prompted Barclays chief economist Kieran Davies to bring forward his rate cut forecast from May to April.

While RBA governor Glenn Stevens has previously put fair value for the Aussie dollar around 75 US cents, that estimation has probably fallen, in line with the continued deterioration of iron ore prices, he said.

“The RBA seems more concerned about the renewed weakness in commodity prices led by iron ore,” Mr Davies said.

“With commodities slumping again and the currency only partly reflecting that, you’ve got a gap opening up again between the currency and the terms of trade and I think that’s been a persistent source of frustration for the RBA.”

But Annette Beacher, TD Securities chief Asia-Pacific macro strategist, said the RBA needed to question why the iron ore price was falling before taking out the razor.

While falling demand from China had played a part, Australian iron ore producers were also responsible for the plummeting prices which continue to eat into government revenues, she said.

Figures show iron ore shipments from Port Hedland jumped about a year ago and remain high, despite the iron ore price having halved during that time, with mining giants BHP Billiton and Rio Tinto reportedly driving down the price to garner market share.

“There is fresh speculation that the RBA may be forced to cut again as soon as next week as this key commodity price continues to fall while the Australian dollar remains elevated,” Ms Beacher said.

“However, as Australia’s iron ore producers are somewhat responsible, surely the RBA needs some perspective here?”

CMC Markets chief market strategist Michael McCarthy said lower iron ore prices would not drive the RBA to cut rates, since the central bank already expects declines in the mining sector.

If anything, the Australian dollar’s fall this week made an April cut less likely, he said.


By Belinda Merhab
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  1. Jurgen S.

    And the Australian property bubble is just about to get bigger…