Reserve Bank cuts rates to record low in emergency action

The Reserve Bank of Australia has cut official interest rates to a record low of 0.25 per cent as it forecasts "significant job losses" and attempts to shield the economy from the financial fallout of the coronavirus pandemic.

Governor Philip Lowe warned on Thursday the coronavirus could inflict permanent damage on people's lives and the economy.

RBA governor Philip Lowe said the package of measures would aid the economy.Credit: AAP

"We are expecting a major hit to economic activity and incomes in Australia that will last for a number of months. We are also expecting significant job losses," he said.

"The scale of these losses will depend on the ability of businesses to keep workers on during this difficult period."

The bank's quarter of a percentage point reduction in the official cash rate, part of a package of emergency measures, is the first change to rates outside an ordinary monthly meeting this century.

It follows a $17.6 billion emergency government stimulus package set to be passed by Parliament next week.

Dr Lowe said the bank would hold the cash rate at 0.25 per cent "until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2 to 3 per cent target band".

He also announced the RBA would target the interest rate on Australian government three-year bonds at 0.25 per cent. It would do this by buying bonds in the secondary market starting on Friday.

The RBA will also provide at least $90 billion at 0.25 per cent over three years to banks if they lend that cash to small and medium-sized businesses.

"The Reserve Bank will also continue to provide liquidity to Australian financial markets by conducting one-month and three-month repo operations in its daily market operations until further notice," he said.

Dr Lowe said the package would aid the economy.

"The various elements of this package reinforce one another and will help to lower funding costs across the economy and support the provision of credit, especially to small and medium-sized businesses," he said.

Soon after Dr Lowe's announcement, Treasurer Josh Frydenberg said the government would sink up to $15 billion into helping small lenders support small and medium-sized businesses.

He said the government's debt agency, the Australian Office of Financial Management, would provide the $15 billion through wholesale funding markets used by small banks and non-bank 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."

Dr Lowe said the crisis had to be managed through close coordination between policymakers in the government and the Reserve Bank. He said it was important to remind Australians the crisis was serious, but temporary.

"As we deal with it as best we can, we also need to look to the other side when things will recover. When we do get to that other side, all those fundamentals that have made Australia such a successful and prosperous country will still be there," he said.

"To help us get to the other side we need a bridge. Without that bridge, there will be more damage, some of which will be permanent, to the economy and to people's lives."

Dr Lowe has previously signalled 0.25 per cent is the low point for official interest rates.

It follows a 0.25 percentage point cut at the bank's February meeting. The RBA had the cash rate at 1.5 per cent at the May federal election but started cutting last June in a bid to drive down unemployment and lift wages.