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The RBA has slashed interest rates to their lowest level in Australian history as the economy gets set for a coronavirus battering

Jack Derwin

The official cash rate has never been lower than today.

The Reserve Bank of Australia (RBA) set the interest rate at just 0.5% on Tuesday, just a third of what it was less than 12 months ago. The move lower was widely expected, as the coronavirus outbreak cannonballs Chinese production and threatens supply chains around the world.

"The coronavirus has 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," Governor Phillip Lowe said in a statement.

"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."

What is certain is that it will take a serious toll on China, Australia's largest trading partner, at least in the short-term. Last week, China's manufacturing PMI data plummeted from 50 to 35.7, indicating a significant contraction.

"Policy measures have been announced in several countries, including China, which will help support growth," Lowe said. "Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries."

Various travel bans, restricting both Chinese tour groups leaving the country and China visitors arriving in Australia, already threaten key sectors including tourism and education, while sated demand puts a broad group of Australian exports, including iron ore, at risk as well.

"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," Lowe said.

"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."

In the backdrop was Australia's bushfire crisis, which was already tipped to shave GDP growth, and an already soft economy. Australia's unemployment rate ticked up to 5.3% last month while missing wage growth remains a national mystery.

"There are plenty of domestic reasons which would have justified a cut, even without COVID-19," KPMG chief economist Brendan Rynne said in a note issued to Business Insider Australia. "Demand remains extremely soft, with consumer spending flat as households seek to increase their savings rather than spending the rise they enjoyed in their household disposable income -- due to tax cuts as opposed to wages growth."

"But the addition of the coronavirus’ stultifying effects on the Chinese economy have quickly worked their way through to Australia both via the travel ban and a slowing down of demand for our commodities. The World Health Organisation’s raising of the threat level posed by the virus cast the die for a rate cut and forced Governor Lowe’s hand," he added.

Looking further ahead, the RBA remains upbeat on the country's economic prospects.

"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," Lowe said.

But others remain unconvinced.

"While I believe the RBA was obliged to cut rates today, we should be in no doubt that this is bringing Australia into uncharted and potentially dangerous waters," Rynne said. "The cash rate is now within one more cut of entering into the 0.25% territory - the RBA’s self-assessed ‘lower bound’ – which is the rate nominated for potential adoption of quantitative easing."

While the RBA's most recent cut may help support long-term growth, by reducing the cost of borrowing and increasing the flow of money in the economy, it needs to be followed by a government stimulus package, economists have urged.

With the government suggesting on Monday that one is in the pipeline, the economy may now get the stimulus it has long craved.