RBA Is All-But Certain to Cut Key Rate, Money Markets Show

(Bloomberg) -- Australia's central bank is all-but certain to cut interest rates Tuesday, money markets show, after a key manufacturing gauge in top trading partner China slumped.

Traders are pricing in a 25 basis-point cut by Reserve Bank Governor Philip Lowe and his board as a done deal and see a slight chance of a 50 basis-point reduction. At the close of business in Australia Friday, markets were pricing in just a 15% chance of a cut and most economists were predicting no change.

JPMorgan Chase & Co.'s Sally Auld switched Monday to calling an easing. “The bank will be responding foremost to protect against the higher chance of global recession,” she said of the RBA. “Officials' commentary in recent months has highlighted that global developments could be an important driver of policy outcomes.”

Goldman Sachs Group Inc. also sees Lowe cutting 25 basis points Tuesday and following up with another quarter-point cut in April. That would bring the cash rate to its effective lower bound of 0.25%.

Others that switched to an easing Tuesday included AMP Capital Investors Ltd., National Australia Bank Ltd., Royal Bank of Canada, Westpac Banking Corp., Citigroup Inc. and Societe Generale.

In response to the market upheavals, Lowe will chair a meeting by telephone Monday of the Council of Financial Regulators to discuss the situation. The body includes Australia's main financial regulatory agencies and the Treasury.

China could be heading for a worse-than-expected first-quarter contraction after the manufacturing sector reported activity at a record low in February due to the coronavirus outbreak. Global equities suffered their sharpest declines since the 2008 financial crisis last week, while commodities plunged.

Investors are looking to the Federal Reserve and other major central banks -- even with their limited ammunition -- to contain the fallout from the outbreak. Fed Chairman Jerome Powell in a statement on Friday said the U.S. central bank is ready to cut rates as the epidemic “poses evolving risks” to the American economy.

The weakness in China is reverberating Down Under. From education to tourism to agriculture and resources, the viral epidemic will set back Australia's economy. It is the most China-reliant economy in the developed world with about a third of its exports going there.

Australia's China Reliance Backfires as Virus Fallout Spreads

Lowe could prove a reluctant cutter. One argument may be that monetary policy can't actually do much to revive growth in the current context -- an approach set last week by the Bank of Korea.

Lee Ju-yeol, governor of South Korea's central bank, surprised markets when he refrained from a knee-jerk cut. He said the appropriate response at this stage was targeted fiscal support for the companies most affected by the biggest virus outbreak outside China.

Australia's government is also considering targeted stimulus for the worst-hit sectors -- a move that may impair the budget's return to surplus.

The virus shock comes after a horror summer of wildfires that engulfed an already drought-stricken east coast. The RBA cut three times last year -- mirroring the Fed -- to spur firms to invest and hire in order to speed up economic growth and inflation.

Since then the labor market has help up and companies' investment intentions improved. But the biggest response has come in housing: data Monday showed the upswing in prices, which started mid-2019, has already recouped most of the losses of a near two-year swoon. Melbourne reached a record high, and Sydney isn't far behind.

What Bloomberg's Economists Say

“The COVID-19 outbreak has significantly shifted the economic landscape for the RBA and other central banks. Disruptions are already having a more severe impact on Australia's economy than the RBA anticipated, and are likely to intensify over coming weeks. We expect the remaining 50bps of traditional monetary policy easing to be delivered as early as this week, to cushion the oncoming impact on the Australian economy from global, and potentially domestic, disruptions.”

James McIntyre, economist

The economy's traditional shock absorber, the currency, has fallen about 7% this year and is trading around its weakest level since 2009.

--With assistance from Garfield Reynolds and 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, Edward Johnson

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