Australia feels drag from falling export prices as RBA meets

[SYDNEY] Australia's trade account was in the red for the ninth straight month in December as falling commodity prices continued to crimp export earnings, highlighting one reason markets are wagering on a cut in interest rates this week.

Tuesday's data from the Australian Bureau of Statistics showed a deficit of A$436 million in December, bringing the shortfall for the second half of last year to A$6.5 billion.

In the six months to December, earnings from iron ore alone were down A$8 billion even as shipment volumes swelled. Total exports to China shrank by over A$9 billion.

The blow to company profits and national income adds to the case for more stimulus from the Reserve Bank of Australia (RBA), which holds its first policy meeting of the year on Tuesday.

Speculation is intense it will trim the cash rate a quarter point to 2.25 per cent, when a decision is announced at 0330 GMT.

While only 9 of 29 analysts in a Reuters poll tipped a move this week, markets are leaning toward a cut.

Interbank futures imply around a 60 per cent chance of an easing to 2.25 per cent and are fully priced for it by March. A further cut to 2.0 per cent is built in by mid-year.

Likewise, yields on 10-year government debt are already trading below the cash rate at just 2.43 per cent.

It would be the RBA's first easing since August 2013 and a sharp turnaround from its previous meeting in December when it had signalled a period of stability for policy.

A move would be partly aimed at offset the drag from sliding export prices, which is hurting both company profits and mining investment. The RBA's own index of commodity prices dropped more than 19 per cent in 2014.

The situation has been made all the tougher by a protracted slowdown in China, Australia's biggest export market.

There was some relief in December as exports of rural goods and gold rose strongly, while the falling cost of oil helped knock 1 per cent off the country's import bill.

There was also evidence of resilience in the housing market as approvals to build new homes dipped by a surprisingly modest 3.3 per cent in December.

That followed an increase of almost 20 per cent over the previous two months and still left approvals 8.8 per cent higher than in December 2013.

REUTERS