Australian Central Bank Maintains Interest Rate, Warns of Worsening Economic Outlook

Australia is in the midst of an economic crisis, as it has some of the highest unemployment in decades and the price of iron ore (Australia’s chief export) is dropping to historic lows.

Australia is in the midst of an economic crisis, as it has some of the highest unemployment in decades and the price of iron ore (Australia’s chief export) is dropping to historic lows.

In response, the Australian Central Bank opted to maintain interest rates, stunning many analysts, while simultaneously warning of an even bleaker outlook for the economy in months to come.  According to a report on the World Socialist Web Site, the Reserve Bank of Australia (RBA) opted to maintain interest rates at the record low level of 2.25% during its April 7, 2015 meeting. It also warned of a bleak economic forecast for the balance of 2015, possibly foreshadowing future rate cuts.

The rate cuts have been in an effort to prop up the sagging Australian economy, which has barely seen any growth in months. Business investing has virtually dried up, unemployment is at an all-time high, and the Nation’s chief export item, iron ore, projects to reach record lows of $40 per tonne later this year. Indeed, iron ore has dropped a whopping 24 percent in value since February.

According to Deloitte Access Economics, every $1 drop in iron ore prices equates to lost tax revenues of about $300 million. As a result, the dropping price of iron has already created an approximate $4 billion addition to the government’s projected $40 billion budget deficit for 2015-16.

Further, housing prices have skyrocketed thanks to low interest rates and the resulting high demand. Rising housing prices were a major factor in the RBA’s decision not to reduce interest rates. The interest rates are already lower than they have ever been since World War II, but it has done little to stimulate economic growth. Home prices are up 22 percent since January 2013, placing most properties out of the grasp of the typical middle class family.

The business sector is calling for cuts to social programs and reduced employment safeguards (like overtime and weekend pay premiums) to stimulate growth and reduce the deficit. Meanwhile the press has taken the current administration, under the leadership of Prime Minister Tony Abbott, to task for abandoning its promises to the financial sector. Many in the media and a number of financial analysts believe that Australia’s economy has become too intertwined with China’s, which is currently showing signs of its own period of contraction.

Whatever the cause, Australia’s economy does not show signs of recovery in the immediate future. Nor will interest rates likely rise anytime soon. If anything, the RBA may cut interest rates again, despite the damage this may do to the housing market.