Rate cuts less likely as global recovery bolsters mining sector
developed nations this month as growing iron ore shipments, rallying commodity prices and rebounding Chinese exports added to signs global demand is strengthening. Australian prime minister-elect Tony Abbott said plans to scrap
carbon and mining taxeswould boost exports to China, the nation’s largest overseas market. ‘‘The bearish view on China has not played out,’’ said John Honan, the Sydney-based chief economist atAusbil Dexia,which oversees the equivalent of $8.9 billion. ‘‘There’s a rising growth environment internationally and that’s supporting markets and our economy and will continue into the rest of this year and next year,’’
Mr Honan said. Iron ore shipments fromWesternAustralia’s Port Hedland, the world’s biggest bulk terminal, climbed inAugust as cargoes increased to China. At the same time prices for iron ore delivered to the Chinese port of Tianjin have climbed about 22 per cent fromthis year’s lowinMay. Ausbil predicts theRBA will keep its key rate at 2.5 per cent until June 2014 and raise it to 3 per cent by December next year.
Data this month showed China’s overseas shipments rose 7.2 per cent inAugust froma year earlier, beating forecasts for a 5.5 per cent increase,while manufacturing
strengthened. Economists are split on the direction theRBAwill take over the next 12 months, with 11 of 32 polled by Bloomberg predicting the central bank will keep rates unchanged until the third quarter of 2014. A further 12 are forecasting at
least one more cut and nine are projecting at least one rate increase by then.
The case for lower rates stems fromthe fact that Australia’s mining investment boom has peaked and gains in commodity exports are unlikely to replace the job losses that will occur as project spending declines, according to Westpac,which has forecast two further cuts fromthe RBA. ‘‘We’re about to get a resource
export boom,which is jobs-poor growth as compared to an investment boom that’s peaked,’’ said Justin Smirk, senior economist at Westpac in Sydney. ‘‘China can have better-thanexpected growth, commodity prices can be better than expected and rates can still go lower inAustralia,’’ he said. The recent revival in China data is also boosting theAustralian dollar, putting pressure on industries from manufacturing to tourism,which theRBAhas said may fill the growth deficit left as miningwanes. The Aussie reached US92.51¢ on Tuesday, the strongest since July, and has gained 3.9 per cent this month after the RBA left its key rate unchanged lastweek. Policymakers reiterated on September 3 that the Aussie remains high, adding that further depreciationwould benefit the economy.
Frequently Asked Questions about this Article…
Rate-cut expectations have fallen because signs of a global recovery are boosting Australia’s mining sector. Growing iron‑ore shipments, higher commodity prices and stronger Chinese exports have pushed two‑year bond yields up and reduced the market odds of a cut (interest‑rate‑swap data showed the chance of a cut by end‑December fell to about 37% from 61%).
A strengthening mining sector—from rising iron‑ore shipments to firmer commodity prices—is supporting Australia’s economy and makes it less likely the RBA will cut rates soon. Ausbil Dexia expects the RBA to keep rates at 2.5% until June 2014 and to lift them to about 3% by December 2014, though some economists (and Westpac) still see scope for further cuts.
Iron ore shipments from Western Australia’s Port Hedland climbed in August as cargoes to China increased, and prices for iron ore delivered to Tianjin have risen about 22% from this year’s low in May. Those trends are helping commodity producers and the mining sector recover.
Economists are split: of 32 polled by Bloomberg, 11 forecast the RBA will keep rates unchanged until the third quarter of 2014, 12 expect at least one more cut, and nine predict at least one rate increase within that period. Individual forecasters like Ausbil and Westpac have differing views (Ausbil sees a hold then rises; Westpac has forecast further cuts).
China’s overseas shipments rose 7.2% in August year‑on‑year—beating forecasts—and manufacturing strengthened. That revival is boosting global demand for commodities, lifting prices and supporting Australia’s mining sector and overall market sentiment.
The Aussie rose to about US92.51¢ and gained roughly 3.9% over the month after the RBA left rates unchanged. A stronger dollar can hurt exporters, tourism and manufacturing by making their goods and services more expensive overseas; the RBA has noted that a depreciation could benefit the economy.
Australia’s two‑year bond yields rose the most among developed nations this month as markets priced in a lower chance of rate cuts. For fixed‑income investors, rising short‑term yields typically mean lower bond prices and affect expected returns on cash and short‑dated bonds.
Yes. The prime minister‑elect at the time, Tony Abbott, said plans to scrap carbon and mining taxes would boost exports to China. Policy moves that reduce industry costs or taxes could improve miner profitability and increase export volumes, which can be positive for mining stocks and related investments.
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