Demand for iron ore, which accounts for more than a 5th of the nation’s export income, has slumped, and while this has increased pressure on the Reserve Bank of Australia (RBA) to cut the official cash rate, the RBA have once again stood their ground.
While the price of iron ore, one of Australia’s biggest exports, was halved in 2014, and the currency declined to 85.06 U.S cents, the RBA are waiting to see how weakening demand from China and rising supply of ore impacts the economy, before possibly making any changes to the cash rate.
The reasoning for the RBA’s decision was also based on high unemployment rates, marginal wage growth, a slow pickup of non-mining investments and an elevated currency.
The Reserve Bank governor, Glenn Stevens, has pursued what many are referring to as a ‘policy of patience’ by leaving the official cash rate on holdat a record low for 15-months. However this strategy has allowed for movement with minimal risk, and for the nation’s monetary system to operate, unlike some other countries.
While some economists are suggesting that a rate decrease will occur if export revenue continues to decrease, others are speculating that rates will increase during 2015. Rate rises, they say, are likely to occur between April and June next year, so that the property market which is beginning to heat-up can be contained at a satisfactory temperature.
A rate rise, says the Organisation for Economic Cooperation and Development (OECD), will reduce investor housing investment and curb further increases in housing credit, which at present, is adding to the risk of national financial and economic stability as home prices are pushed-up.
Of course, while housing price increases encourage home buying consumption and home construction, there is a concern that a sharp decrease could have a profound impact on the Australian economy.
Undoubtedly the key to economic stability is balance. This is why a steady, sure-footed approach has been taken up.
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Written by eChoice