The recent iron ore slump below $US100 a tonne, along with the sharp drop in consumer confidence, is casting doubt on consensus expectations that the next move by the Reserve Bank of Australia on interest rates will be a hike.
Last week, National Australia Bank was the last of the big four banks to call the end of the current rate cut cycle, which has seen the official cash rate drop 225 basis points since November 2011, to a record low of 2.5 per cent.
But, with iron ore slumping below $US100 per tonne for the first time in close to two years and consumer confidence plunging in the wake of the Federal Budget, that’s being questioned by some economists.
Markets are now pricing in a 17 per cent chance of a rate hike within the next 12 months. That’s down from a 50 per cent chance before the budget was presented last week, and from an 80 per cent chance in April.
“On the risks, iron ore at $US97.50 and little response from the Australian dollar has us thinking the risk of a rate cut over the next 12-18 months is now around the same as a rate hike,” Deutsche Bank chief economist Adam Boyton said.
In this scenario, unemployment could take a hit if iron ore was to remain at current levels for the rest of the year, instead peaking at around 6.5 per cent, rather 6.25 per cent, Mr Boyton said.
However, iron ore is expected to make a mild recovery and Deutsche Bank are forecasting to unemployment rate to be stuck between 5.75 per cent and 6.25 per cent.
“In our view we aren’t yet at the point where we’d include a rate cut in our forecasts off the back of the current iron ore price. Given, however, the post-Budget weakness in sentiment and the current weakness in iron ore; we remain comfortable with our ‘low for long’ cash rate view,” Mr Boyton said.
Most analysts expect iron ore to recover slightly in the second half, with Goldman Sachs, which is slightly more bearish than others, forecasting a price of $US105 per tonne in the September quarter and $US100 per tonne in the December quarter. Citi forecast an average price of $US100 per tonne for the rest of the calendar year.
However, both investment banks see heavy falls in the iron ore price in 2015
This story Administrator ready to work first appeared on Nanjing Night Net.