RBA ‘could cut rates on Thursday’ ahead of next month’s scheduled board meeting

A pedestrian walks past the Reserve Bank of Australia (RBA) building in Sydney. Picture: AAP

If there’s any comfort to be taken in the coronavirus crisis, it’s that we learnt something in 2008 and the mechanisms are now in place for a rapid response to emerging cracks in the global financial system.

The expectation after a Reserve Bank statement on Monday is that the central bank will announce a further rate cut on Thursday, ahead of next month’s scheduled board meeting.

In the meantime, it will engage in quantitative easing through the purchase of Australian government bonds, and conduct one-month and three-month repurchasing operations to support liquidity in financial markets.

The RBA said it would announce further policy measures to “support the Australian economy” on Thursday.

Of course, no financial system is bulletproof, and there will be many serious challenges to come.

Panicked markets are also inherently unpredictable, drawing comfort from interventions that would be meaningless in different circumstances.

Who would have thought that three words spoken by then-European Central Bank president Mario Draghi - “whatever it takes” - would be the balm that settled the markets and effectively ended the euro crisis?

It’s too early in the current crisis for a Draghi-like solution, so it was left to the RBA and its global counterparts to roll the bazooka into place and start firing off stimulatory rounds.

Acting out-of-cycle, the Reserve Bank of New Zealand slashed official rates by 75 basis points to 0.25 per cent, saying they would remain at the new level for at least 12 months.

The US Federal Reserve invited an emergency response from the RBA by announcing a massive, 100 basis-point cut its benchmark target rate to a range of zero per cent to 0.25 per cent.

The range will be maintained until the economy has “weathered recent events and is on track to achieve its maximum employment”.

The Fed also said it would buy $US700bn in bonds and mortgage-backed securities to help stabilise markets, and coordinate with the Bank of Canada, the Bank of England, the Bank of Japan, the ECB and the Swiss National Bank to enhance the provision of US dollar liquidity.

Markets roiled, more in response to the scale of the crisis than the nature of the policy announcements.

However, investors should take some measure of comfort that the same group of regulators which helped Australia emerge relatively unscathed from the financial crisis more than a decade ago is again calling the shots.

The Council of Financial Regulators, incorporating ASIC, the prudential regulator APRA, the RBA and the Treasury, said on Monday that the financial system was resilient and well-placed to deal with the effects of the coronavirus.

The banks were well-capitalised and in a strong liquidity position, and “substantial” financial buffers were available to be drawn down, if required, to support the economy.

At the same time, though, trading liquidity had deteriorated in some markets, and the council was meeting with major lenders later this week to discuss how they could best support households and businesses through the challenge.

The council next meets on Friday, only a matter of days away.

But as we’ve already learned, anything could happen between now and then.