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RBA cuts rate to 0.5% to ease virus hurt

Alex Druce
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RBA Rates

The Reserve Bank of Australia has cut the cash rate to a new record low 0.5 per cent

The Reserve Bank of Australia has cut the cash rate to a new record low of 0.5 per cent as it moves to buttress the economy against a worse-than-expected hit from the coronavirus.

Pricing for the 25 basis point rate cut had advanced from an outside chance last week to a foregone conclusion by Tuesday morning, following a torrid weekend for a virus-rattled economy.

In his address following the March board meeting, RBA governor Philip Lowe said earlier forecasts that the economy had reached a "gentle turning point" were now under a cloud.

GDP growth in the March quarter is likely to be "noticeably weaker" 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," Dr Lowe said in his address after the bank's March board meeting.

"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."

Dr Lowe said the virus is expected to delay progress towards the RBA's target for full employment and inflation

He said the RBA board remains prepared to ease monetary policy further.

The market is predicting the next move to 0.25 per cent by June, at which point policymakers would launch quantitative easing measures.

"Once the coronavirus is contained, the Australian economy is expected to return to an improving trend," Dr Lowe said.

Westpac was the first of the big banks out the door on Tuesday to announce it would pass on the full 0.25 per cent reduction in variable interest rates for home loans, as well as small business cash-based loans and overdrafts.

Commonwealth Bank and NAB followed suit soon after.

Prime Minister Scott Morrison had earlier said he expected the margin-pressured banks to "do the right thing" by consumers and pass on any rate cut in full.

Australia's interest rate had already been lowered three times to 0.75 per cent last year in a bid to kickstart an economy that was sluggish even before the summer's bushfires and coronavirus threat came into play.

Retail sales, as well as construction and business investment have fallen, confidence remains soft, poor wages growth has continued and unemployment and underemployment have risen since the last RBA board meeting in February.

December quarter GDP data on Wednesday is expected to show Australia's economy expanded by a soft 0.3 per cent, taking annual growth to a below-trend 1.9 per cent.

Indeed's APAC economist Callam Pickering said further stimulus would be necessary to help the economy meet its unemployment and inflation goals within the next two years.

"The Reserve Bank no doubt recognises that cutting today won't help the economy a great deal, at least not in the short-term," Mr Pickering said.

"But the economic circumstances, both short- and medium-term warrant greater support.

"Even without COVID-19, the Australian economy was not travelling as well as it should be."

AMP's Shane Oliver said given the size of the threat to growth once rate cuts are exhausted at 0.25 per cent, the RBA is likely to turn to quantitative easing during the second half.

"Ideally this should be combined with broad based fiscal stimulus," he said.

Mr Morrison hinted last week the government was putting together "targeted" and "modest" assistance for the likes of the tourism sector, which is suffering due to the travel ban on Chinese visitors in an attempt to contain COVID-19.

Economists on Monday clamoured to bring forward their rate cut predictions after a weekend marred by poor data out of China and a global equities sell-off.

Many are now tipping back-to-back rate reductions in March and April.

The Australian dollar rose to 65.52 US cents, from 65.28 US cents, immediately after the 1430 AEDT decision and was worth 65.55 by 1525 AEDT.