Iron Ore's Weighty Impact on Economy

Sunshine Coast Daily (Maroochydore, Australia), April 5, 2014 | Go to article overview

Iron Ore's Weighty Impact on Economy


MONEY MATTERS

Justin Scattini

THE price of iron ore matters for the domestic economy because iron ore accounts for 27% of Australia's export volumes. The commodity is a key driver of Australia's terms of trade and matters for monetary policy and overall financial settings, in the sense that commodity prices are the medium-term anchor for the currency.

If iron ore prices are now tracking a lower profile for 2014, implying a larger-than-forecast decline in the terms of trade, then we would expect fair value estimates of the Australian dollar to be revised modestly lower as well.

If the Australian dollar fails to move in line with these forecasts, then this may once again provide an interesting dilemma for the Reserve Bank. It might not result in a lower cash rate, but it could see the Reserve Bank become heavier-handed with the Australian dollar.

Indeed, one of the "problems" for the Reserve Bank last year was a persistent divergence between Australia's key commodity prices and the level of the dollar.

The bank tried to offset this divergence by lowering the cash rate such that overall financial conditions were more appropriate, but the Australian dollar's trade-weighted index and iron ore prices still appear to be closely aligned. …

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