RBA hits the panic button as coronavirus recession looms

The Reserve Bank of Australia has hit the panic button in response to fears about the effect of the coronavirus by cutting official interest rates to a record low of 0.5% and indicating there could be more cuts to come to protect the Australian economy.

That decision was immediately met with all four major banks reducing their home loan interest rates by the same 0.25%, ensuring that the stimulus reaches homebuyers as soon as possible.

The RBA meeting was the first since the coronavirus finally roiled global share and bond markets, wiping trillions of dollars from values and causing predictions of a looming recession.

Virus uncertainty has clouded the economic outlook

RBA governor Dr Philip Lowe admitted that the uncertainty around the coronavirus had clouded the near-term outlook for both the global and Australian economies.

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

“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.”

Dr Lowe holds out hope for improving trend

Despite the dramatic decision to cut rates to a new record low, Dr Lowe said that once the virus was contained, the Australian economy was likely to return “to an improving trend”.

He also said the federal government had indicated it would support the economy in those areas most affected by the virus.

The combination of the RBA, federal government and all big four banks acting in concert is a very strong demonstration of the seriousness with which this crisis is being approached.

More rate cuts to come – quantitative easing possible

Another indication of that seriousness is that the RBA left open the door to further rate cuts, despite the fact that interest rates are already at record lows and there are realistically only two more rate cuts that can be made before the RBA is forced to take extraordinary measures such as quantitative easing.

In the statement, Dr Lowe said: “The board is prepared to ease monetary policy further to support the Australian economy.”

After the RBA’s decision was announced, Prime Minister Scott Morrison called on the retail banks to “do the right thing” and pass on any cut in full.

Economic forecasts point to possible recession

The emergency rate cut came as a raft of economic forecasts started to point to a global recession, depending on whether the coronavirus is contained or becomes a global pandemic.

The Organisation for Economic Co-operation and Development has downgraded its forecasts for global and Australian growth, with an estimate that even if the virus is contained, already sluggish global growth will slip by 0.5%.

Figures already show Australian weakness

Due to Australia’s strong exposure to China through commodity exports, we will be hit particularly hard, with growth here tipped to fall at least 0.5%.

Economic statistics released before the RBA decision showed that the export sector and government spending were lower than expected.

The Australian Bureau of Statistics released numbers showing that Australia’s current account surplus narrowed by 85% in the December quarter to $1 billion.

The lower than expected current account surplus means that net exports will only contribute a small amount to economic growth, which is already weak.

Federal government needs to act fast

There are now strong indications that the federal government will not wait until the May budget before announcing stimulus measures to ensure that the Australian economy doesn’t slip into recession.

ABS data also showed that general government spending rose by up to 0.7% in the quarter, which will only add 0.1% to growth – similar to the contribution from exports.

That shows that the federal government needs to make some serious changes to boost its stimulus, if it is to make a more meaningful contribution to Australian GDP.

That may well require the government to ditch the promise to balance the budget.