Australia cuts rates to record low as risks mount

SYDNEY • Australia's central bank cut interest rates to a record low yesterday, in what is expected to be the first in a spate of policy stimulus around the world to fight the economic fallout from the coronavirus.

This was the fourth reduction by the Reserve Bank of Australia (RBA) in less than a year, bringing the cash rate to 0.5 per cent amid mounting evidence that momentum in the A$2 trillion (S$1.8 trillion) economy has stalled.

In a short post-meeting statement, RBA governor Philip Lowe said the coronavirus epidemic was having a "significant" hit on Australia's economy and that it was difficult to predict how large and long-lasting the effects would be.

The RBA board "will continue to monitor developments closely and assess the implications of the coronavirus for the economy", he added. "The board is prepared to ease monetary policy further to support the Australian economy."

Markets had also swung wildly in recent days to price in a move amid speculation that policymakers would have to act to steady market panic over the coronavirus outbreak.

Financial futures imply the next move to 0.25 per cent by June, at which point policymakers are also expected to launch quantitative easing for the first time in Australia.

The outbreak is plunging the world economy into its worst downturn since the global financial crisis more than 10 years ago, the Organisation for Economic Cooperation and Development warned on Monday, urging governments and central banks to fight back to avoid an even steeper slump.

Markets are also pricing in a 50 basis point cut from the United States Federal Reserve this month.

Earlier, Australian Prime Minister Scott Morrison said his government was working closely with the RBA on a response to the coronavirus outbreak, adding that both were "highly aligned" in their understanding of the challenges before them.

Mr Morrison also urged the country's biggest banks to lower their lending rates.

Commonwealth Bank and Westpac were quick to respond, reducing their variable home loan rates by 25 basis points.

In Australia, the tourism, transport, hospitality and retail sectors have been jolted by a travel ban on China since the start of last month.

A raft of data this week prompted economists to downgrade their expectations for fourth-quarter gross domestic product (GDP) after growth in exports and government spending disappointed.

Data being released today is expected to show that Australia's economy expanded by a pedestrian 0.3 per cent in the December quarter, taking annual growth to a sub-trend 1.9 per cent.

In a troubling sign, Mr Lowe said GDP growth in the current quarter was likely to be "noticeably weaker" than earlier expected.

AMP economist Shane Oliver said there was a risk of a contraction in the fourth quarter.

"In fact, if December quarter growth turns out to be negative, a recession may have already begun," he said. "Given the rising risk of recession, further policy stimulus is clearly required."

REUTERS