Reuters/Sydney


Pressure is mounting for a cut in Australian interest rates as soon as next week as plunging prices for iron ore, the country’s single most valuable export earner, punish both mining profits and government tax revenue.
The Reserve Bank of Australia (RBA) holds its monthly policy meeting on April 7 and markets are wagering heavily it will follow up a February easing with another quarter point cut to an all-time low of 2%.
In part any move would be aimed at lowering the Australian dollar, which would assist commodity producers exporting US dollar-priced products.
Westpac chief economist Bill Evans noted iron ore prices had fallen around 15% since the RBA’s March policy meeting, while the local currency was only down a single US cent.
“That is why it will be important for the bank to maintain an easing bias when it announces the cut next week,” said Evans. “It will maintain downward pressure on the AUD.”
Interbank futures imply a better than 60% probability of an April easing, and are fully priced for one by May. Indeed, investors are already wagering rates will fall to 1.75% before the year is out.
RBA governor Glenn Stevens says Australia is struggling with the end of its mining boom, noting that past mining booms had almost all ended very badly for Australia, usually through runaway inflation followed by a major crash. But Stevens says the RBA will continue to support the economy.
Spot Iron ore stood at $49 a tonne after plunging 3.9% on Wednesday – the weakest since the index was introduced in 2008 and could drop as low as $47, forecasts Westpac Bank.
The decline had a deadening impact on mining shares with Fortescue Metals Group off 3%, while Atlas Iron fell 3.8% and BC Iron 4%.
With little prospect of rising iron ore prices, as global supply continues to expand in the face of waning demand growth, miners are counting on lower oil prices, cheaper freight rates and a weaker Australian currency to turn a profit.
Iron ore is Australia’s single biggest export earner so the collapse in prices has been as big a blow to government tax revenues as to mining profits.
A half-decade after insulating Australia from the worst of the global financial crisis, the giant mining state of Western Australia is being forced to defer iron ore royalties which underpin tens of thousands of jobs.
Stephen Walters, chief economist at JPMorgan, cites estimates from Australia’s Treasury that every $10 per tonne drop in the iron ore price cuts up to A$3bn off the national budget.
“Iron ore prices have fallen 70%, putting the ultimate drag on revenue up to A$30bn,” said Walters.
That has only intensified pressure on Treasurer Joe Hockey to come up with savings or tax raising measures in his annual budget due in May, while also ensuring that the drag does not harm an already sluggish economy.
“With fiscal policy being tightened, the onus will be on monetary policy to provide the support the economy needs.”