A torrid weekend for a coronavirus-rattled global economy has firmed market expectations for a Reserve Bank rate cut this week, with local economists clamouring to tip back-to-back reductions in March and April.
Market expectations for a 25 basis point cut at Tuesday’s Reserve Bank board meeting blew out from 18 per cent on Friday to a certainty on Monday morning following a weekend marred by poor data out of China and a virus-driven rout of global stocks.
Another cut is almost completely priced in by May.
Australian equities – fresh off their worst week since the GFC – plunged almost three per cent to a new 10-month low by noon on Monday as the coronavirus fallout hammered the local bourse for a seventh trading day.
Investors are hoping for news from financial regulators who have been discussing the impact of the virus outbreak on the Australian economy.
Wall Street is also expected to take an early hit after troubling manufacturing data from China further dented a fragile global economic sentiment.
The weekend’s PMI survey showing business activity in the Chinese economy fell to a record low last month.
These developments seemingly kicked a number of local economists off the fence on Monday, with many bringing forward predictions of the Reserve Bank’s next cut to tomorrow.
Westpac had on Friday reaffirmed its guidance there would be “no excitement” at Tuesday’s RBA board meeting but now expects the RBA to cut the cash rate by 0.25 percentage points to a record-low 0.5 per cent.
Chief economist Bill Evans said that was likely to be followed up by a second cut to 0.25 per cent at the April board meeting.
This stance was echoed by St George chief economist Besa Deda, who added that a quantitative easing policy was “increasingly likely to be deployed around mid year” as the RBA reaches its self-imposed rates floor.
However, ANZ economist David Plank is standing by his call that the RBA will leave the rate on hold despite the dramatic shift in market pricing.
He said ANZ expected the RBA to “emphasise its immediate focus is on ensuring the smooth functioning of the financial system” and “adopt an explicit easing bias” while supporting the federal government’s plan for “targeted, modest and scalable” assistance for affected industries.
The tourism sector in particular faces losses running into billions of dollars due to the travel ban on Chinese visitors in an attempt to contain COVID-19.
NAB ‘s new rate prediction of a dual March-April cut follows earlier expectations of a downward movement in April and June.
That outlook already factored in a local economy that was struggling even before the coronavirus reared its head.
Australia’s interest rate had already been lowered lowered three times to 0.75 per cent last year in a bid to free up cash for tightening household budgets and eat into labour market slack.
The central bank board’s first interest rate decision for 2020 was to delay cutting to a fresh record low 0.5 per cent, with RBA Governor Philip Lowe in February citing improved unemployment figures for December, low borrowing costs, recent tax refunds and improved property market indicators.
But economic data has since been weak as retail sales, construction and business investment fall, confidence remaind soft, poor wages growth continues and unemployment and underemployment rise.
The summer’s bushfires have also added pressure and will drag further on what was already expected to be a weak December quarter GDP print on Wednesday.
Meanwhile, JP Morgan’s Sally Auld said a 0.50 percentage point cut tomorrow was no small chance.
“There is also the possibility that the RBA brings other policy measures (liquidity related) into play tomorrow,” she said in a note.
“Other central banks within region have adopted similar measures in recent weeks.”