The Reserve Bank of Australia (RBA) this afternoon cut the cash rate by 25 basis points to a new record low of 0.5%. This is the fourth cut by the RBA in less than a year and follows a tumultuous February in which markets slid on fears of coronavirus.
Why did the RBA just slash interest rates?
The RBA said the cut was made to support the economy as it responds to the coronavirus outbreak. Previously, the RBA had indicated that the impact of coronavirus would reduce Australia's economic growth by 0.2% in the first quarter of 2020. The Organisation for Economic Co-operation and Development has predicted the virus would cut 0.5% of Australia's economic growth this year.
RBA Governor Philip Lowe said, "the coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected."
Prior to the outbreak, the RBA saw signs that the slowdown in the global economy was coming to an end. Now, Lowe says it is too early to tell at what point the global economy will return to an improving path.
"The coronavirus outbreak overseas is having a significant effect on the Australian economy at present," Lowe said, "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 previously expected."
Financial markets have been volatile as investors assess the risks associated with coronavirus with the S&P/ASX 200 (INDEXASX: XJO) falling nearly 10% in the past fortnight.
The unemployment rate increased to 5.3% in January and has been around 5.25% since April last year. Wage growth remains subdued and the RBA does not expect it to pick up for some time. Although the housing market has picked up and mortgage loan commitments have increased, demand for credit by investors has remained subdued. Credit conditions for small and medium businesses remain tight.
What now?
With this latest cut, the RBA is just a single 25 basis point cut away from the point at which it has said it would commence quantitative easing.
In its statement, the RBA flagged that it was prepared to ease monetary policy further to support the Australian economy.
