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Reserve Bank makes interest rate decision amid coronavirus panic

Pictured: RBA governor Philip Lowe, Australian cash, COVID-19.
RBA Governor Philip Lowe has handed down the March rate decision amid coronavirus panic. Images: Getty
  • Reserve Bank of Australia cuts interest rate to new low of 0.50 per cent

  • Governor Philip Lowe warns Australia’s growth will be hit by coronavirus

  • Westpac the first major bank to pass along full rate cut

Australia’s official interest rate has hit a fresh low of 0.50 per cent as the country faces a “very challenging time” under the coronavirus threat.

Prime Minister Scott Morrison on Monday said his focus is on “ensuring that we keep Australians in jobs, we keep businesses in business, and we keep investment flowing during what will be a very challenging time for the Australian economy”.

Those challenges are reflected in the Reserve Bank of Australia’s (RBA) decision to cut the official interest rate by 0.25 percentage points to a record low of 0.50 per cent.

That’s the fourth rate cut since June last year and was unsurprising to several experts observing the extreme market volatility and concerning China manufacturing data.

In fact, 90 per cent of experts surveyed on the interest rate panel predicted the Bank would cut again in 2020, with 56 per cent predicting the illness would cause “significant” negative impacts for the Australian economy.

“The coronavirus outbreak coming on the back of the bushfires is likely to see the economy go backwards this quarter which in turn is likely to push unemployment up further after the rise to 5.3 per cent seen in January,” AMP Capital chief economist Shane Oliver predicted.

Domain’s Trent Wiltshire also agreed, noting that while the RBA was likely uncomfortable cutting rates due to racing house prices, the softening employment figures were hard to ignore.

Australia’s unemployment rate jumped from 5.1 per cent to 5.3 per cent over January this year.

Additionally, as many as 133,200 Australians could lose their jobs as the government implements tougher coronavirus travel bans.

The Tourism and Transport Forum Australia said the bans on people travelling from China and Iran will see hundreds of thousands jobless as international visitor numbers plummet.

“The escalating shock from the coronavirus means the RBA will be forced to lower the cash rate,” Wiltshire said.

Rocketing house prices

Australia’s national median home value is set to reach a new record high within weeks, should it maintain its current hurtling rate of growth, CoreLogic figures revealed on Monday.

Image: CoreLogic
Image: CoreLogic

In fact, across Australia, five capital cities are already seeing home values at record highs, with Sydney in February seeing standalone house values soar above $1 million again.

“The decision by the RBA to cut rates was widely expected considering the downside impact of coronavirus on the Australian economy and household sentiment,” CoreLogic head of research Tim Lawless said.

Continuing, he said that while usually the RBA would have concerns about housing affordability, this particular cut might have a limited impact on the housing market given the current climate.

“This is partly because the latest rate cut is unlikely to be fully passed on to mortgage rates. Furthermore, a low cash rate coupled with concerns around the global spread of coronavirus, has the potential to spook consumers and drag confidence lower.”

Nearly one-in-three Australians are concerned about the economy given the previous rate cuts, Mozo research today revealed, with more than a quarter cutting back on spending due to the cuts, while another quarter are concerned for their jobs.

“When it comes to consumer confidence there are a number of factors of play, and the rate cuts are certainly heightening worry. A lack of meaningful wage growth, persistent underemployment and a number of retailers folding post Christmas is also weighing on consumer confidence,” Mozo director Kirsty Lamont said.

“You could say the RBA is caught between the coronavirus and a hard place. While a rate cut could help to stimulate the economy, it could also further spook consumers.”

Global economy ‘clouded’ by coronavirus: Lowe

Reserve Bank of Australia Governor Philip Lowe addresses the National Press Club in Sydney, Wednesday, Feb. 5, 2020. The wildfires will slow growth by 0.2 percentage points in the six months through March, Lowe told the National Press Club. (Joel Carrett/AAP Image via AP)
RBA governor Philip Lowe. Image: Getty

In his official statement, Lowe said the near-term outlook for the global economy is “clouded” by coronavirus.

“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors,” he said.

“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.”

He said it will be difficult to predict the full effect, but expects the Australian economy to improve once the respiratory illness is contained.

Banks respond

Westpac Bank announced it would pass along the full 0.25 per cent cut within minutes of the announcement, joining small lender Athena Home Loans.

Here’s how much you’ll get should the banks pass on the full or partial cut.

Image: Finder
Image: Finder

“Despite three RBA rate cuts in 2019 by a total of 75 basis points, banks passed on only 57 of those basis points to consumers, (19 basis points per cut) on average,” insights manager at Finder Graham Cooke said.

“If your bank passes on a partial cut of only 10 basis points, that could still save you $10,000 over 30 years on an average loan.”

Full statement by Philip Lowe, Governor: Monetary Policy Decision

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak.

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. 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.

Long-term government bond yields have fallen to record lows in many countries, including Australia. The Australian dollar has also depreciated further recently and is at its lowest level for many years. In most economies, including the United States, there is an expectation of further monetary stimulus over coming months. 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.

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.

The unemployment rate increased in January to 5.3 per cent and has been around 5¼ per cent since April last year. Wages growth remains subdued and is not expected to pick up for some time. A gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range.

There are further signs of a pick-up in established housing markets, with prices rising in most markets, in some cases quite strongly. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. 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.

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