Rate cut on the cards

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

a woman

After the minutes of the most recent RBA meeting were released yesterday, futures markets are pricing in a 60% chance of the RBA cutting rates in October.

The Reserve Bank of Australia (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), more fears that China’s growth is stalling, falling commodity prices and rising cost pressures, the RBA has suggested that the high Australian dollar is weighing more heavily on the economy than expected.

With US and European central banks easing monetary policy, it appears that 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 the RBA may hold off until November, while waiting to see how Chinese growth and commodities prices are trending.

A recent report published by the Minerals Council of Australia and the September update by the Bureau of Resources and Energy Economics (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 Southern America. The BREE report also predicted that the value of resource exports in 2012/13 would fall from over $200 billion to a revised $190 billion.

If commodity prices don’t recover, 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 Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Fortescue Metals Group (ASX: FMG) and Mount Gibson Limited (ASX: MGX).

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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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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