Reserve Bank of Australia cuts official cash rate to 0.5pc

The RBA has kicked off what’s anticipated to be a global round of interest rate moves with a widely expected cut of 0.25 percentage points.

Reserve Bank of Australia governor Philip Lowe. Picture: AAP

The Reserve Bank has cut rates by 0.25 percentage points to a new low of 0.5 per cent, as central banks around the world race to get ahead of the rapidly spreading coronavirus epidemic.

It is governor Philip Lowe’s fourth rate cut in nine months, after similar moves in June, July and October. “The board took this decision to support the economy as it responds to the global coronavirus outbreak,” Dr Lowe said in a statement accompanying the decision.

As recently as two weeks ago markets had priced in almost zero chance of a cut at the March meeting, as Dr Lowe emphasised the costs associated with pushing its key cash rate even lower.

But significant outbreaks of the coronavirus epidemic in Europe, South Korea and the Middle East changed the arithmetic around the potential spread and economic damage from the virus and triggered massive losses in global sharemarkets.

The Australian dollar rose to US65.60c following the widely expected result.

“It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth. Inflation remains low almost everywhere and unemployment rates are at multi-decade lows in many countries. In most economies, including the United States, there is an expectation of further monetary stimulus over coming months,” Dr Lowe said in the RBA’s statement.

“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.

“Given the evolving situation, it is difficult to predict how large and long-lasting the effect will be. Once the coronavirus is contained, the Australian economy is expected to return to an improving trend.”

Shortly after the RBA’s decision was announced, Westpac said it would decrease variable interest rates by 0.25 per cent per annum for home loan customers, with Commonwealth Bank making a similar announcement shortly after.

Later Tuesday afternoon, NAB announced it would lower home loan, small business and business overdraft variable rates by 25 basis points, effective 13 March.

ANZ was the last of the big four banks to move, announcing it would decrease variable interest home loan rates in Australia by between 0.25 per cent per annum and 0.35 per cent per annum across a range of standard variable rate indices.

Macquarie reduced its variable interest rates by 0.25 per cent per annum for home loan customers, effective 19 March.

Suncorp Bank cut by 0.25 per cent per annum for home loan customers following the Reserve Bank of Australia’s cash rate decision, effective from 20 March 2020.

Ahead of the RBA decision, Prime Minister Scott Morrison had put the major banks on notice, saying he expected them to do their bit to support Australia through the threat of the coronavirus health emergency and pass to on the cuts in full to borrowers.

“The government absolutely expects the big banks to come to the table and to do their bit in supporting Australians as we go through the impact of the coronavirus,” the Prime Minister said.

He contrasted the unwillingness of banks to pass on in full the previous three rate cuts since June of last year with the response of the “great Australian company” Qantas, which responded to official requests to evacuate Australians from China and Japan.

“I don’t see it any different to what Qantas. On behalf of all Australians I expect them to do the right thing by Australians. The big banks will do their bit just like Qantas did their bit.”

A number of economists expect the economy to contract in the March quarter under the dual weight of this summer’s unprecedented bushfires and the damage associated with the health emergency.

The major banks took a sharp u-turn to trade lower after the RBA’s announcement. The big gave up gains made earlier on Tuesday, led by a 0.8 per cent drop in Westpac shares to $23.02 as it announced it would pass on the full rate cut to its variable loan customers.

Commonwealth Bank fell 0.6 per cent to $80.05, while ANZ was down 0.4pc to $24.24 and NAB has slipped by 0.2 per cent to $24.42.

Those losses helped trim the overall market’s earlier gains, with the ASX200 up 1.2 per cent, after gaining as much as 3 per cent earlier in the session.

There are fears that, should the virus continue to spread, the toll on economies will stretch into the June quarter and threaten a first Australian recession since the early 1990s.

National accounts for the December quarter are released Wednesday.

The RBA is in the vanguard of a new wave of global monetary policy easing, with the Bank of Canada expected to cut to 1.5 per cent when it meets on Wednesday night, Australian time.

Federal Reserve chairman Jerome Powell over the weekend issued a short statement that “the coronavirus poses evolving risks” and that the Fed will “use our tools and act as appropriate to support the economy”. Investors took this as a sign that the Fed would cut to 1.25 per cent on March 19.

Gathering expectations of coordinated easing were enough to break a string of heavy losses on Wall Street, where stocks bounced on Monday night, leading a rally on the ASX and across the region.