RBA in pole position to fight coronavirus with rate cuts

The Reserve Bank could be first among global central banks to cut interest rates and tame fears around the coronavirus epidemic.

Financial markets are rushing to price in a rate cut from the RBA on Tuesday Picture: AAP

The Reserve Bank could be first among global central banks to cut interest rates and tame fears around the coronavirus epidemic, which continue to lash financial markets.

Financial markets on Monday rushed to price in an RBA interest rate cut at its policy meeting on Tuesday after US Federal Reserve chairman Jerome Powell said on Friday that the central bank would act as appropriate to support the world’s largest economy.

Weak Chinese manufacturing data over the weekend also ­cemented fears of significant economic fallout from the coronavirus, with Australia taking direct fire given that more than a third of its exports head to China.

Australia’s fourth-quarter GDP result due on Wednesday is expected to show economic growth at its slowest rate in a decade even before the coronavirus and severe bushfires over summer slammed business activity and confidence.

Some economists were saying the RBA could act aggressively on Tuesday, slashing its official cash rate by 50 basis points to a record low 0.25 per cent, putting it on track to deploy measures such as quantitative easing by midyear.

A cut this week would be a huge about-face for the RBA, which has promoted an optimistic growth outlook since the start of the year, while signalling a reluctance to lower its cash rate target from the current 0.75 per cent.

Sally Auld, chief economist at JPMorgan, said markets should be pricing in at least some probability that the RBA cuts by 50 basis points on Tuesday, saying the balance of risks to global and domestic economic growth had shifted markedly to the downside.

“Conventional central bank wisdom suggests that the policy of least regret for the RBA is to move quickly once it becomes clear that there are material downside risks to the forecasts for growth and inflation,” Ms Auld said.

Westpac chief economist Bill Evans said he expected the RBA to cut interest rates by 25 basis points and follow it with a further cut in April. That implied the RBA would probably be rolling out alternative policy measures such as government bond buying by midyear, Mr Evans said.

“QE has always been part of Westpac’s forecasts but we envisaged the policy starting in the fourth quarter of 2020. These developments are likely to bring that timetable forward to midyear,” Mr Evans said.

By cutting, the RBA would be seeking to keep the dollar weak even as it trades at its lowest levels since 2009, giving the country’s exporters much-needed support.

Still, some thought the RBA would be acting with undue haste if it cut interest rates this week.

Former RBA board member John Edwards said the market’s jitters over the coronavirus was a case where media and market alarm had “run a little ahead of the facts”.

The number of new cases in China was heading down, Mr Edwards said. “That is the market of most consequence for Australia, and it appears to be still on track for a resumption of most economic activity in the second quarter,” he said.

A cut from the RBA could be followed quickly by its peers as other central banks are also looking decidedly dovish.

Bank of Japan governor Haruhiko Kuroda earlier on Monday said the central bank was closely monitoring developments and would “strive to provide ample liquidity and ensure stability in ­financial markets through appropriate market operations and asset purchases”.

The BoJ offered to lend ¥500bn yen ($7bn) of two-week funds to financial firms.

There were growing bets the Bank of Canada would also chime in with a rate cut this week, said Su-Lin Ong, head of market strategy at RBC Capital Markets.

“We’ve brought forward our Canadian cut because of the widening spread of the corona­virus and the fallout in financial markets, with a solid risk the rates are cut again in April,” she said.

Two Bank of Canada cuts would see the benchmark rate fall from 1.75 per cent to 1.25 per cent.

Bets on a cut by the Reserve Bank of New Zealand at its meeting on March 25 also rose on Monday. “The COVID-19 situation is evolving rapidly, spreading fast outside China — in­cluding, now, in the US — and the virus is now present in New Zealand, although it appears to be isolated so far. A marked global slowdown is guaranteed,” ANZ chief economist Sharon Zollner said.

The Wall Street Journal