HSBC chief economist for Australia and New Zealand Paul Bloxham said a recent rally in iron ore prices coupled with increased demand from China could “diminish” the chances of the RBA making another rate cut in May.
“For Australia, an important part of China's policy stimulus program is the focus on infrastructure investment, which was announced in March,” Mr Bloxham said.
“Infrastructure investment is steel-intensive and thus supports demand for iron ore. This week's loosening of Chinese monetary policy, combined with last month's fiscal plans, has finally started to see a lift in the iron ore price.
“For the Australian economy, the iron ore price is always an important variable. Iron ore accounts for around 22 per cent of Australia's exports and 4 per cent of GDP. The rally in the iron ore price is therefore an important story for the RBA,” he said.
Mr Bloxham pointed out that the RBA’s decision for its meeting next month is “finely balanced”.
“On the one hand, underlying inflation is in the lower half of the 2.0 to 3.0 per cent target band, at 2.3 per cent [year-on-year], and growth is below trend, suggesting the RBA could cut rates further,” Mr Bloxham said.
“On the other hand, recent timely data on jobs, retail sales and even the Q1 inflation print surprised on the upside, and the Sydney housing market is still booming, suggesting they could decide to sit still.
“With such a finely balanced decision the track for the iron ore price could tip the scales for the RBA,” he said.
