RBA cuts interest rates to 0.50 per cent in response to coronavirus

RBA cuts interest rates to 0.50 per cent in response to coronavirus

6 March 2020

At its meeting on 3 March 2020, the Reserve Bank of Australia decided to lower the cash rate by 25 basis points to 0.50 per cent. The RBA took this decision to support the economy as it responds to the global coronavirus outbreak.

The cut – the fourth in less than 12 months – follows turmoil in financial markets over the past week driven by fears about the impact of 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,” said Philip Lowe, governor of the Reserve Bank.

“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,” said Mr Lowe.

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 RBA 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.

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.

Earlier on Tuesday, Prime Minister Scott Morrison said both his government and the RBA were aligned on meeting the economic challenge.

“We had a hook up yesterday, the Treasurer and I and the finance minister, along with the Treasury Secretary, with the government Reserve Bank and the deputy governor. We are highly aligned, highly aligned in our understanding of what the challenges here.”

Westpac Banking Corp immediately moved to pass the full 25 basis point official rate cut through to mortgage borrowers, putting pressure on the other major banks to do the same.

CBA, NAB and ANZ soon followed reducing the variable rate for home loan customers by the full 0.25 percentage points.

Westpac’s standard variable rate is now 4.58 per cent.