Reserve Bank cuts rates to protect the economy

Reserve Bank Board meeting

The Reserve Bank has cut the cash rate by 25 basis points or a quarter of a per cent to a record low of 0.50 per cent.

What has changed since the last meeting?

Concerns about the spread of the COVID-19 coronavirus outbreak have dominated attention.

The CoreLogic national home price index rose by 1.1 per cent in February; up 6.1 per cent on the year.

The jobless rate rose from 5.1 per cent to 5.3 per cent in January.

The wage price index rose by 0.5 per cent in the December quarter to be up 2.2 per cent on the year.

Business investment fell by 2.8 per cent in the December quarter.

Investment expectations for 2020/21 are up 8.8 per cent on a year ago.

Private sector credit lifted 0.3 per cent in January to be up 2.5 per cent on the year.

The budget deficit was $5.4 billion (0.3 per cent of GDP) in the year to January.

The Aussie dollar has held between 64-66 cents, hitting 11-year lows.

The value of home loans rose 4.4 per cent in December.

Retail trade rose 0.5 per cent in real terms in the December quarter – best gain in 18 months.

US and Australian sharemarkets hit record highs in mid-February before sliding in the last week.
The assessment

• It is all about the coronavirus. “The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.” The Reserve Bank remains positive about future prospects for the economy once the coronavirus is contained.
Perspectives on interest rates

• The Reserve Bank has cut the cash rate by 25 basis points to 0.50 per cent after previously cutting rates in June, July and October 2019, each by 25 basis points. There have now been 16 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.

• Previously rates rose seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.
What are the implications of today’s decision?

• The Reserve Bank has done its job. Now it is up the Australian Government to outline the fiscal response. The Reserve Bank is all but spent – it is debateable that today’s 25 basis point move will do much to boost growth. The Australian Government has more firepower given that the budget is broadly balanced. The aim must be to prevent the economy from slipping into recession – an event that would have longer-lasting effects.

Published by Craig James, Chief Economist, CommSec