Rate cuts less likely as global recovery bolsters mining sector
The chances of Australia’s central bank cutting interest rates from a record low2.5 per cent are evaporating on signs the mining industry is gaining on the back of a global economic recovery. The odds of a reduction by the end of December dropped to 37 per cent, from61 per cent twoweeks ago, interest rate swaps data compiled by Bloomberg show. Australia’s two-year bond yields rose the most among other
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.
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free