Australia: RBA cuts rates to all-time low in March to counter effects of coronavirus
At its 3 March monetary policy meeting, the Reserve Bank of Australia (RBA) decided to cut the cash rate from 0.75% to 0.50%, an all-time low. March’s decision was in line with the expectations of most market analysts. The RBA’s dovish tone again signaled that further monetary policy easing could be on the cards in the coming months.
Justifying the decision to stand pat, Governor Philip Lowe stated that the “coronavirus has clouded the near-term outlook for the global economy” and that growth will therefore most likely weaken in the short-term despite policy measures announced in several countries. The outbreak of Covid-19 has weighed on the Australian dollar and has negatively affected the education and travel sector so far, while it is set to hit domestic spending. On a more positive note, the housing market is showing further signs of recovery, which bodes well for investment activity going ahead.
Looking forward, the Bank left the door open to further monetary easing if necessary, to reduce unemployment and bring inflation within the target range. The RBA acknowledged the magnitude and duration of the negative effects stemming from the coronavirus are hard to assess. However, it expects economic activity to recover once the virus is contained, on the back of rising infrastructure spending, low interest rates and recoveries in both residential construction and consumer spending.
Reflecting on the decision, Robert Carnell and Francesco Pesole, economists at ING, noted:
“The outlook for the virus and Australia is more likely to worsen in the near term than improve. As a result, it is virtually impossible now to imagine that we will not see a further 25bps of easing from the RBA at the April meeting. Markets are already largely pricing this in.”
The next monetary policy meeting is scheduled for 7 April.