Reserve Bank expected to cut interest rates ahead of more coronavirus economic stimulus

Reserve Bank expected to cut interest rates ahead of more coronavirus economic stimulus

Posted

March 19, 2020 06:04:03

Interest rates could sink to 0.25 per cent today in an emergency move by the Reserve Bank as it unleashes quantitative easing on the financial system.

Key points:

The RBA board normally meets once a month but will today hold an emergency meetingRBA governor Philip Lowe will address the media at 4:00pm (AEDT)The Federal Government is expected to release a new stimulus package within days

The Federal Government is also working on new stimulus measures to try to prevent the coronavirus outbreak shutting down large parts of the economy, with details to be released within days.

Prime Minister Scott Morrison has now warned daily life will be very different in Australia for the next six months at least, with authorities asking people to self-isolate to prevent COVID-19 spreading.

Officials also concede the unemployment rate will start rising in coming months as the economy adjusts to this unprecedented shock.

All of a sudden, Australia has entered unchartered economic territory and the next few days will be crucial.

What is happening today?

The Reserve Bank Board is holding an emergency meeting. It will release a statement after the meeting at 2:30pm AEDT.

Economists expect the RBA will cut the interest rates to 0.25 per cent, which will be the lowest in Australia’s history.

After this, the interest rates can’t go lower — the RBA has already said 0.25 per cent is its lower bound.

At 4:00pm, the RBA governor Philip Lowe will release details of the RBA’s asset purchase program (i.e. quantitative easing) that will involve purchasing Australian Government bonds.

The bond-buying program will flood Australia’s financial system with extra cash to ensure it keeps functioning smoothly under the unprecedented stresses of the COVID-19 outbreak.

Is it unusual for the RBA to meet more than once a month?

Yes. The RBA board typically only meets on the first Tuesday of every month.

It held its regular meeting this month, on March 3, and decided to cut rates to 0.5 per cent because it believed the summer’s catastrophic bushfires and the coronavirus outbreak was going to hit the economy hard.

However, in the last two weeks, global stock markets have been in freefall as the world continues to reel from the economic fallout of the COVID-19 pandemic, and it has dawned on Australian authorities how serious the health issue has become locally.

Federal and state governments have now implemented extraordinary measures to try to slow the transmission of COVID-19 in Australia, including banning non-essential outdoor gatherings of more than 500 people and indoor gatherings of over 100 people.

Earlier this week, Dr Lowe released a statement saying he was prepared to pump more money into the financial system if necessary, including via bond buying.

He also said the RBA would start conducting one-month and three-month repurchase (repo) operations each morning “until further notice” to inject the system with emergency cash.

Didn’t the Federal Government just announce a stimulus package?

Yes. It announced $17.6 billion package last week.

The package was designed to do three things: support confidence, boost investment and keep Australians in a job.

More than half of the package, $11.5 billion, will hit Australia’s economy in the next few months in a bazooka-blast of cash designed to prevent the economy falling into recession.

It will include one-off cash payments of $750 to social security, veteran and other income support recipients and eligible concession card holders (roughly 6.5 million Australians, half of which will be pensioners), and billions of dollars of measures to support the cash flow of businesses.

However, last week some economists warned that the package wouldn’t be enough to stop a recession because the coronavirus pandemic was evolving too rapidly and was going to hit Australia’s economy much harder than imagined.

Within a week, the Morrison Government conceded more stimulus would be needed.

What’s in the Government’s second stimulus package?

The Government plans to release details of its new stimulus measures within days.

The details must be released before Federal Parliament next week to give Opposition and crossbench MPs time to review them before voting on the package.

Industrial Relations Minister Christian Porter says the new stimulus measures are being designed with the “safety net” in mind.

“What is now being considered is what I would describe, more generally, as safety net issues,” Mr Porter said yesterday.

“To identify people who will be in need of assistance, whether they’re businesses or business sectors or obviously individuals, and clearly we’re going to have some issues around unemployment.

“With the employment issues, I mean very, very sadly, it’s going to mean for a period of time over the next six months that people who have never had any contact whatsoever with the welfare system for the entirety of their lives will be needing assistance from the taxpayer.

“So you know it is extraordinary, these are unprecedented times in many ways, but not issues that we’re unprepared for,” Mr Porter said.

Topics:

business-economics-and-finance,

money-and-monetary-policy,

economic-trends,

federal-government,

australia

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