The iron ore rally could stop the RBA from easing in May

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One of the key tenets surrounding concern about the big fall in iron ore, and coal, has been the impact on Australia’s terms of trade — our national income. It implies Australia as a nation would earn less and economic growth would suffer.

Additionally the fall in the price of iron ore has been expected to strip billions of dollars from the Federal budget.

It seems to have all coalesced into Joe Hockey inadvertently calling the bottom of the iron ore market earlier this month.

But since then the price has rallied hard enough for HSBC chief economist Paul Bloxham to warn clients that the “iron ore rally could tip the RBA scales.”

Bloxham said the big rally over the past week “followed China’s aggressive monetary policy loosening earlier in the week, but also reflects signs that higher cost supply, particularly from China, is starting to be cut back. China’s fiscal support is also focused on infrastructure development, which should support demand for iron ore. This makes the RBA’s next meeting an even closer run affair.”

He recognises that the RBA has suggested it will cut rates again but says that things have changed since the last meeting:

The past month has delivered upside surprises to local jobs, retail and inflation numbers and now the iron ore price is rallying too. A further rally in the iron ore price through next week could see the case for a near term rate cut diminished further.

No doubt, given that iron ore rallied another 5% after the publication of his note to clients, Bloxham might be thinking the chances of a cut have reduced even further.

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