RBA Cuts Rates to 0.5% as China Slowdown Continues

(Bloomberg) -- Australia kicked off an expected worldwide policy response to China's slowdown and fallout from the coronavirus with an interest-rate cut that's set to operate in tandem with fiscal measures to cushion the economic blow.

Reserve Bank chief Philip Lowe reduced the cash rate by a quarter percentage point to 0.5%, a new record low, as expected by traders and half of economists surveyed. The governor said he's prepared to ease further as the virus outbreak is having “a significant effect” on Australia's economy.

“The uncertainty that it is creating is also likely to affect domestic spending,” Lowe said in a statement Tuesday announcing the decision. “The board is prepared to ease monetary policy further to support the Australian economy.”

The Australian dollar jumped as much as 0.5% immediately after the decision and traded at 65.43 U.S. cents at 4:56 p.m. in Sydney. An expected narrowing of the rate differential between the RBA and the Federal Reserve, where markets expect three cuts this year, was a likely driver of the bounce.

Lowe is a reluctant cutter. As recently as last month he said that balancing all the risks in the economy favored staying still. This stance was jettisoned following the shutdown in China that's hit Australia's tourism and education industries and other exporters. The virus's spread now poses a worldwide risk.

“Policy measures have been announced in several countries, including China, which will help support growth,” Lowe said in the statement. “In most economies, including the United States, there is an expectation of further monetary stimulus over coming months.”

Global policy makers have sought to reassure markets they are ready to respond to the epidemic as fears mount that the world economy is heading toward recession. The leaders of the International Monetary Fund and World Bank said they stood ready to help member nations, while Group of Seven finance ministers and monetary officials will speak by teleconference Tuesday.

“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,” Lowe said. “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.”

In this case, though, Australia's central bank isn't going to have to face the downturn alone, with fiscal support in prospect.

“The Australian government has also indicated that it will assist areas of the economy most affected by the coronavirus,” Lowe said. Before the RBA meeting, Prime Minister Scott Morrison said the Treasury is working closely together with the other agencies “to address the boost that we believe will be necessary.”

Morrison urged major banks to pass on any RBA cut. The four top lenders have all since confirmed that mortgage rates will be reduced by the full amount.

The RBA now has only one 25 basis-point cut left in the locker before it reaches its effective lower bound of 0.25%. Lowe will find himself dragged toward quantitative easing, should the economy need further monetary stimulus.

What Bloomberg's Economists Say

“The Reserve Bank has fired the starter's gun on a widely-anticipated round of coordinated central bank easing. Further cuts were flagged, alongside a package of fiscal support. Risks now lie with the RBA utilizing unconventional monetary policy tools, particularly if there are dislocations in domestic credit markets.”

James McIntyre, economist

Lowe said the RBA will ensure that the Australian financial system has sufficient liquidity.

Yet even before wildfires and the virus, Australia's economy wasn't particularly strong. Gross domestic product probably rose 0.4% in the final three months of 2019 from the prior quarter, and 2% from a year earlier, economists estimated ahead of data Wednesday.

“GDP growth in the March quarter is likely to be noticeably weaker than earlier expected,” Lowe said, having removed any 2020 forecast from the statement. “Once the coronavirus is contained, the Australian economy is expected to return to an improving trend.”

One area helping Lowe is the currency, the economy's traditional shock absorber that has depreciated almost 7% since the start of the year. China's fiscal and monetary stimulus will also assist in time.

--With assistance from Tomoko Sato.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Victoria Batchelor

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