31/03/2015 – Melting Iron Ore Pressures RBA as April Rate Cut Now in Play

Australia’s central bank is under intensifying pressure to cut interest rates next week as iron ore, the nation’s biggest export, plunges to a decade low.

Traders’ bets that the Reserve Bank of Australia will lower its cash rate by a quarter percentage point to a new record low of 2 percent have doubled to an 80 percent chance from 40 percent two weeks ago, swaps data compiled by Bloomberg show. Iron ore, which fell 47 percent last year, is headed for the biggest quarterly loss since at least 2009 as surging low-cost supplies swamp the global market while growth in demand from China slows.

A third of Australia’s exports, or about 6 percent of gross domestic product, goes to China, and the majority of those shipments are iron ore. Kieran Davies of Barclays Bank plc estimates the fall in commodity prices means Australia’s real exchange rate was 4 percent overvalued this quarter, prompting him to bring forward his rate-cut forecast to April from May.

“The RBA seems concerned that you’ve got fresh weakness in commodity prices at a time when the real exchange rate hasn’t fully reflected that,” Davies said Tuesday. “They’ve had a strong easing bias and so I think they’ll consider cutting rates next week. But I think they’ll still be anxious about the Sydney property market.”

Home prices in Australia’s biggest city have jumped 35 percent from a 2012 trough, raising concerns at the central bank. Lending for housing advanced 7.2 percent in the 12 months through February from a year earlier, the fastest pace since 2010, RBA figures showed Tuesday.

New home sales climbed 1.1 percent in February from January, led by an 11.1 percent jump in apartments, according to private data released today.

“The headlines for the national new housing sector continue to dazzle,” said Harley Dale, chief economist at the Housing Industry Association.

Source – bloomberg Business