Interest rates are likely to fall today with back to back cuts possible
An interest rate cut of a magnitude not seen since the global financial crisis more than a decade ago could be on the cards today following seven straight days of share market losses.
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Seven straight days of share market falls set off by the coronavirus outbreak have led analysts to predict back to back interest rate cuts starting today.
Financial markets have already priced in an interest rate cut from the Reserve Bank of Australia when it meets today, with many analysts predicting back to back cuts this month and next.
But Goldman Sachs Australia chief economist Andrew Boak has said a 50 basis point cut – which would take the central rate to a low of 0.25 per cent – “cannot be ruled out”.
The last time rates were cut so heavily was when the RBA dropped rates by a full 1 percentage point in early 2009 as the economy was reeling from the global financial crisis.
Official interest rates fell from 7 per cent in September 2008 to 3 per cent in April 2009 as the RBA cut deeply to aid the economy during the GFC.
The RBA has a lot less room to move this time, with the official interest rate sitting at just 0.75 per cent.
While the rate cuts will be good news for mortgage holders, retirees who rely on term deposits and other interest rate-linked investments for income will be negatively impacted.
RBC capital markets analysts Su-Lin Ong and Robert Thompson say back to back rate cuts in March and April are likely, as well as other measures from the Federal Government to help the economy, with coronavirus having a heavy impact on sectors such as tourism and education, and spooking financial markets generally.
“We would also anticipate a fiscal response in Australia consistent with the emerging global shift and we note the changing language from the PM over the weekend,’’ RBC says.
“The fiscal response may be two fold. Firstly, small targeted assistance to sectors most impacted by the coronavirus which can be announced and delivered quickly.
“Secondly, more significant and sustained measures in the May 2020-21 Budget including the bringing forward of part or all of the next round of income tax cuts and additional incentives for businesses.’’
The share market plunged again this morning after another fall on Wall Street over the weekend.
The S&P/ASX200 index was down 160.5 points, or 2.49 per cent, in early trade as stock prices bled red across the board.
IG market analyst Kyle Rodda said the weekend had even more bad coronavirus news as well as disappointing Chinese economic data.
“Italy, Iran and South Korea reported another spike in coronavirus cases, with several countries announcing an expanding travel blacklist,” he said.
“The first death from the disease was reported in the United States, and in Australia.
“And in what’s probably the most impactful news from a markets perspective, China released its latest PMI surveys, with the data showing business activity in the Chinese economy fell to an all-time low last month.”
No sectors were spared in the local sell-off on Monday, as the market waits for any news from an emergency meeting of Australia’s financial regulators to discuss impact of the outbreak on the economy.
Meanwhile business leaders were unanimous in rejecting the value of any rate cuts at this stage.