Reserve Bank drops interest rates to new record low to reduce virus impact

Reserve Bank governor Philip Lowe has taken rates to historic lows to reduce the economic impact of COVID-19.

Reserve Bank governor Philip Lowe has taken rates to historic lows to reduce the economic impact of COVID-19. Photo: TND

The Reserve Bank has slashed interest rates to a new record low of 0.5 per cent to reduce the economic impacts of the novel coronavirus.

Financial markets had fully priced in another rate cut on Monday after a large jump in the number of COVID-19 infections outside China suggested the economic fallout would be worse than previously anticipated.

Reserve Bank governor Philip Lowe said the 25 basis-point cut was necessary to support sustainable growth in the economy.

“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target,” Dr Lowe said in his statement.

“The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.”

The historic rate cut comes after the OECD said in a special report on Monday evening that the virus would slash half a percentage point (roughly $10 billion) from Australia’s annual economic output.

The organisation called on governments to announce a stimulus package to offset the negative financial impact of the virus – echoing previous calls from several prominent economists.

Angela Jackson, an economist with Equity Economics, told The New Daily on Monday that the RBA would be justified in cutting rates, given the economic damage already caused by the virus.

But other economists believe interest rates are already so low that most banks will not pass on the full benefits of a cut, which they say will do little for the economy other than boosting property prices.

IFM Investors chief economist Alex Joiner said the central bank was cutting rates because the coronavirus had forced its hand.

“Before the coronavirus was evident, the Reserve Bank had significant reservations about further cuts in interest rates, the effectiveness they would have on the economy, and the impact on confidence,” Dr Joiner told The New Daily, referring to the risks associated with rising household debt.

“But with the impact of the coronavirus on the Australian economy, we are likely to see at least one quarter of negative growth and perhaps two. So the Reserve Bank has really had its hand forced.”

Dr Joiner said he expected the government would also announce a “modest” stimulus package that includes targeted measures such as tax relief and accelerated depreciation for businesses affected by the virus.

The main focus for the government now, he said, is to support impacted businesses so that job losses are minimised.

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