Rate Cut in the Cards

The high Australian dollar is impacting the economy more than expected, says RBA.

Mike King
Mike King
Sep 20, 2012 at 12:00AM

SYDNEY -- After the minutes of the most recent Reserve Bank of Australia meeting were released yesterday, futures markets are pricing in a 60% chance the RBA will cut rates in October. With U.S. and European central banks easing monetary policy, it appears Australia is being forced to follow along or risk a higher dollar and the impact that would have on our economy.

While futures markets are betting on a rate cut in October, several economists suggest that the RBA may hold off until November, waiting to see how Chinese growth and commodities prices are trending.

The RBA appears to be under more pressure than ever to cut official interest rates next month -- but we wouldn't bet on it.

With the high Australian dollar strangling our exporters (including the resources sector), fresh fear that China's growth is stalling, sinking commodity prices, and rising cost pressures, the RBA has suggested that the high Australian dollar is weighing more heavily on the economy than expected.

A recent report published by the Minerals Council of Australia and the September update from the Bureau of Resources and Energy Economics, or BREE, both suggest that cost pressures on Australian resources companies are making them uncompetitive on the global stage. The high local currency is also raising concerns that global investment may bypass Australia and instead go to projects in cheaper nations in Africa and South America. The BREE report also predicted that the value of resource exports in fiscal 2013 would fall from more than $200 billion to a revised $190 billion.

If commodity prices don't recover, then Australia's terms of trade -- a key measure of income from exports -- would be lower than the RBA has forecast.

Several of our big iron ore miners could report lower earnings in the next quarter thanks to falling commodity prices, including Rio Tinto (ASX: RIO.AX), BHP Billiton (ASX: BHP.AX), Fortescue Metals (ASX: FMG.AX), and Mount Gibson (ASX: MGX.AX).

The Foolish bottom line
If the Australian dollar stays high and Chinese data and commodity prices don't recover, the RBA is more likely than ever to cut rates soon -- but don't bet on it!

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