Aussie interest rate cuts become a possibility

Onlookers believe that the Reserve Bank of Australia (RBA) may be forced to cut interest rates by the end of the year.

The central bank meets tomorrow for its board meeting and nobody is expecting any cuts to the rate in the immediate future, but global events could force the board of directors to take action in the middle-term.

According to The Australian, the collapse in iron ore prices – caused by a slowdown in manufacturing throughout the world and particularly in China – is far greater than the RBA was expecting.

The Aussie economy is heavily reliant on its mining sector and the change in global conditions is likely to have a big affect on its hitherto strong-performing currency, with the Australian dollar coming under renewed and unwelcome upward pressure.

Glenn Stevens, RBA governor, has mooted the possibility of rate cuts at parliamentary hearings in recent times.

He said: "It is conceivable that you could get terms of trade falling but there is some event that causes safe-haven flow towards us.

"I do not actually think that will happen. You can imagine it, but most likely if the terms of trade fall a lot, then the currency will go down, I think."

Mr Stevens added that it as "gut feel" that the Australian dollar was slightly overvalued in the present markets. The currency has traded between US98c to $US1.05 for almost 12 months.
Despite the association between the two dollar currencies and the expected quantitative easing in the US, it is the events in China that are perhaps more pressing for Aussies.

The RBA will most likely be able to ride out the deflationary affects of the Fed's monetary policy, but if the markets lose their confidence in China's growth then the cut interest rates could become a very real possibility.

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