RBA Cuts as Coronavirus Clouds Outlook

The spectre of the coronavirus outbreak loomed large over the Reserve Bank’s meeting on Tuesday, with the board cutting the cash rate by 25 basis points to a record low 0.50 per cent.

With uncertainty remaining as to how persistent the effects of COVID-19 will be, Lowe said the board had taken the decision to help protect the economy.

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

“The uncertainty that it is creating is also likely to affect domestic spending.”

With the virus clouding the near-term outlook for the global economy, meaning global growth in the first half of 2020 will be lower than expected, the move is in line with policy measures announced in several countries, including China, to help support growth.

Lowe said the unpredictable nature and duration of the “evolving situation” made it difficult to predict how large and long-lasting the effect will be.

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

“The board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.”

Commsec chief economist Craig James said today’s decision was “all about the coronavirus”, with the ball now firmly in the Australian government’s court in terms of outlining a fiscal response.

“The Reserve Bank is all but spent—it is debatable that today’s 25 basis point move will do much to boost growth,” James said,

“The Australian government has more firepower given that the budget is broadly balanced. The aim must be to prevent the economy from slipping into recession – an event that would have longer-lasting effects.”

The Reserve Bank remains positive about future prospects for the economy once the coronavirus is contained, with Lowe predicting a 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.

Lowe said that the Reserve Bank would continue to monitor developments closely and assess the implications of the coronavirus for the economy.

“The board is prepared to ease monetary policy further to support the Australian economy.”

Australia's big four banks responded immediately to the decision, with major lenders CBA, NAB, ANZ and Westpac all announcing interest rate cuts.