Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist
The Reserve Bank board has cut interest rates again by 0.25% at their March meeting, their fourth such cut since June last year.
The move comes largely in response to the uncertainty caused by the global outbreak of the coronavirus (Covid-19), and up until about last Friday I’d have said it was a close call as to whether the bank would cut or stay put.
The run of soft domestic economic data over the past month would already have been pushing the RBA towards a cut, with inflation well below target and the country remaining some considerable distance from full employment. These factors will have been further compounded by the weekend’s turmoil on share markets, signalling that the coronavirus is affecting the global economy in a very real way. Other central banks, including the Federal Reserve, have also moved towards easing, which in turn seems to have pushed our Reserve Bank over the edge.
Although today’s official cash rate of 0.5% is the lowest on record, it came as no surprise to financial markets who had largely priced in the move already. The question is where to from here?
We have been of the view for some time that the cash rate will be cut to 0.25%, and we see that occurring in all likelihood next month. We expect that this will be the limit of interest rate cuts in this country, and that the next move for the Reserve Bank, if they do intend to act further, will be down the path of quantitative easing.
More broadly, there is a growing impetus for fiscal stimulus to take over the task of spurring on economic growth in Australia. There are finally some promising sentiments coming from the federal government in this regard, and this will be a critical area to watch in coming months.
Ultimately, interest rate cuts won’t reverse the impact of the coronavirus outbreak on our economy. Instead, what the Reserve Banks and other central bankers are aiming to do is provide some support to the economy through this period of uncertainty and debt relief to households and businesses. Once the all-clear is given for coronavirus, these actions will help the economy come up faster and stronger on the other side.
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