Interest rates have been cut to a new record low as Australia’s central bank scrambles to respond to the coronavirus pandemic.

Reserve Bank governor Philip Lowe says while the coronavirus is first and foremost a public health issue, it is having a “very major impact” on the economy and financial system.

“As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities,” he says in a statement issued on Thursday afternoon.

“The result has been major disruptions to economic activity across the world.

“This is likely to remain the case for some time yet as efforts continue to contain the virus.”

At an emergency meeting on Thursday, the central bank agreed to slash the cash rate to 0.25 per cent, the lowest in Australia’s history.

It will also start buying government bonds, a move that would flood Australia’s financial system with extra cash to keep the economy functioning smoothly during the crisis.

As well, it will set up a three-year $90 billion fund for banks to help small- and medium-sized businesses keep their heads above water, and ease some regulatory pressure on the banks to allow them to keep the money flowing.

Banks will be able to start accessing the fund by April 16.

Dr Lowe said these measures complemented the government’s economic stimulus package, which so far is $17.6 billion but is set to be expanded in coming days.

“Together, these measures will support jobs, incomes and businesses through this difficult period and they will also assist the Australian economy in the recovery,” the banker said.

“Australia’s financial system is resilient and well placed to deal with the effects of the coronavirus.”

At the same time, Treasurer Josh Frydenberg announced the government would pour $15 billion into smaller lenders.

“The government’s actions will enable customers of smaller lenders to continue to access affordable credit as the world deals with the significant challenges presented by the spread of coronavirus,” he said.

“Small lenders are critical to Australia’s lending markets, often driving innovation and providing competition for larger lenders.”

The spread of the coronavirus in Australia and across the world has cemented the likelihood the national economy will fall into recession this year, as consumer spending and productivity slumps.

Economists have warned the economy could contract by as much as two per cent in the June quarter, risking a rise in unemployment to almost eight per cent, from around five per cent now.

The latest jobless figures, released on Thursday morning, surprised observers by dropping 0.2 percentage points in February.

The seasonally adjusted unemployment rate dropped to 5.1 per cent in February but the government cautioned the figures may have been collected too early in the month to reflect the impact from the coronavirus.

The rate is expected to sharply increase in coming months.

“Workers in industries such as tourism, education and retail are already being laid off and this will only worsen under travel bans, cancellations of large events and social distancing,” ANZ said in a research note to clients.