The National Australia Bank now sees the Reserve Bank cutting rates to 0.25% and adopting a number of unconventional monetary policy tools to battle the impact of the rapid coronavirus-driven deterioration in both the local and global economies.
In doing this, the RBA will be following the Fed, the Bank of England, the Bank of Japan, the European Central Bank and central banks in Switzerland and Scandinavia in adopting unconventional monetary policy tools to handle weak demand or weak inflation or a combination of both.
The panicked selling on stockmarkets on Monday tells us that investors fear the worst and making out like headless chooks, aided by the slump in oil prices and energy stocks.
The slump in oil prices means that petrol and other energy costs will drop in the coming months, removing more upward pressure on inflation and seeing the CPI did even further, with more sectors showing signs of disinflation.
Not even the lingering price impacts of the bushfires and the continuing hits to confidence and business activity will be enough to offset the impact of the slide in energy costs.
The fall in energy costs will see government tax collections from resource taxes and corporate profits fall in coming months at a time when the government is forced to boost spending to soften the impact of any slowdown, and the fallout from the COVID-19 virus.
At the same time, Westpac now believes Australia will suffer its first recession in 28 years with negative growth in the first and second quarters.
The NAB believes the economy contracted in the March quarter and sees the next rate cut to 0.25% in April.
“This means conventional monetary policy will soon reach its limit given the RBA has said it is unwilling to take the cash rate below 0.25%. This places unconventional policy on the table and we now forecast “yield curve control” to commence by May or June,” the NAB said yesterday.
Yield curve control is a form of quantitative easing where the RBA announces target levels for government bond yields and buys bonds if yields fail to settle at those targets, the NAB explained yesterday. It is a newish monetary policy tool that the Fed is considering using and is being used by the Bank of Japan in conjunction with quantitative easing and negative interest rates.
“The timing is very fluid, depending on the state of the coronavirus outbreak, the economy and financial markets, and the RBA could announce its plans as early as April. Increased containment efforts in Australia and the rest of the world would likely speed the path to unconventional policy.
The NAB says this policy should work in tandem with the spending and tax measures to be announced later this week which will be aiming to minimise job losses by shoring up the cash flow of affected businesses.
The NAB’s business conditions and confidence survey is out later today and will be the first look at the real impact from the bushfires and the coronavirus on activity levels.
Meanwhile, Westpac is calling a recession with chief economist Bill Evans writing in a note yesterday:
“On a quarterly basis we expect the economy will contract in both the first and second quarters by 0.3 percent and 0.3 percent respectively to be followed by a rebound of 1.4 percent and 0.8 percent respectively in the third and fourth quarters.”
“That growth profile constitutes a technical recession but given the expected recovery in the second half of the year it is much more realistic to characterise the situation as a ‘major disruption’ to growth rather than the style of recession that Australia has experienced in the past,” he wrote.
Mr. Evans said the expected rebound in the economy in the second half of the year should prevent unemployment spiking into double-digit territory, an outcome that would lead to increased financial stability risks associated with the housing market.
“In Australia’s last two recessions the unemployment rate lifted from 6 percent to around 11 percent,” he said. “We expect the unemployment rate to hold below 6 percent through this period.”