Australian Economy Australian interest rates Australian recession

Why the RBA will keep on cuttin’

Monday 2 February 2015

Regardless of what happens today, there is one simple reason why the RBA will be forced to keep cutting interest rates (and APRA to keep a lid on house prices). It all boils down to this one chart:

Let me explain. The SDR measure (green) is commodity prices benchmarked against IMF Special Drawing Rights, a kind of global reserve currency. It is a very good proxy for Australia’s terms of trade. The consistent falls in bulk commodities – iron ore, the coals and LNG – is pushing the index down fast and has much further to go yet, with all four commodities yet to bottom.

Next, note that when the same index is calculated in Australian dollars (purple) the trend down has been far slowly since the currency began to depreciate. This has a mitigating effect on the terms of trade falls as income lost via lower commodity prices is regained via the cheaper currency.

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About the author

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.