Blaming the gathering impact of the coronavirus, the Reserve Bank yesterday cut its cash rate for a 4th time in less than a year – this time a 0.25% drop to a record low of 0.50%.
In doing so the RBA became the first central bank to respond directly to the growing impact of the virus on economic growth, especially in China and especially after last week’s massive sell-off.
The RBA’s cut will be the first move by central banks, with the US Fed widely expected to follow at its meeting in a fortnight.
The ASX first off didn’t like the news and down went the ASX 200, it recovered and rose back over an 80 point gain, but then sold off in late trading to be up just 44 points or 0.7% at 6,435.7.
Some economists had started tipping a rate cut of 0.50% but that would have left the RBA with no room to move and hastened the start of a form of quantitative easing if the economy got into real trouble with growth slowing faster than forecast and unemployment rising.
In his usual post-meeting statement Governor Phil Lowe also made it very clear the bank would cut again – it only has one 0.25% reduction to go before it gets to 0.25%.
“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending.
“As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected. Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend.
“This outlook is supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, a positive outlook for the resources sector and expected recoveries in residential construction and household consumption.”
“The Australian Government has also indicated that it will assist areas of the economy most affected by the coronavirus,“ Dr. Lowe said.
The AMP’s chief economist, Dr. Shane Oliver wrote in a note late yesterday (his third of the day!) that “Rate cuts won’t kill the virus or solve supply-side constraints but they will help ease the pain for borrowers through this uncertain period and will help boost growth once the virus is under control.
“The cut in rates to record lows does risk dampening confidence in the short term and it’s a negative for those relying on income from bank deposits.
“However, doing nothing about weak growth and the new threat posed by coronavirus would be a bigger blow to confidence in the economy, the value of household debt is more than double the value of household deposits so the saving for those with a mortgage will be more than double the loss of income for those relying on bank deposits and rate cuts help keep the $A lower than it otherwise would be which helps companies that compete internationally.
“So on balance, there is a boost to growth,” Dr. Oliver said.
“But it’s doubtful that it will be enough. Ideally, more help from fiscal stimulus is required but so far the Government appears to be focussed on a “targeted” and “modest” approach. As a result most the pressure to support the economy remains on the RBA,“ Dr. Oliver wrote.
The Commonwealth, NAB and Westpac banks cut their variable rates by a full 0.25% after all three withheld part of the October 2019 cut of 0.25%.
The cut will put further pressure on bank profit margins at a time when the prices of their shares have been hammered in the sell-off.
“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target,” Dr. Lowe said in his statement on Tuesday afternoon.
“The Board, therefore, judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity. It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy. The Board is prepared to ease monetary policy further to support the Australian economy.”
He pointed out that the virus’ spread had “clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected.”
Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path.
“Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries.
“Financial markets have been volatile as market participants assess the risks associated with the coronavirus. Australia’s financial markets are operating effectively and the Bank will ensure that the Australian financial system has sufficient liquidity,” he pointed out.
