The RBA cut the cash rate to 0.25% earlier this afternoon while announcing a raft of measures to prop up the coronavirus-stricken economy. The health crisis has quickly turned into a financial crisis with the S&P/ASX 200 Index (ASX: XJO) plummeting over 30% from February highs.
The rapidly evolving situation has caused severe volatility in financial markets as the global economy teeters on the edge. Travel restrictions and social distancing requirements have left many businesses reeling. Small businesses and those with high financial leverage or fixed costs are particularly vulnerable.
"Our economy and financial markets will recover"
This afternoon, RBA Governor Philip Lowe told the market, "we are clearly living in extraordinary and challenging times." While primarily a public health issue, the coronavirus has become a major economic problem. "Our communities and financial markets are having trouble dealing with a risk they have never seen before," Lowe said.
Nonetheless, Lowe told reporters, "It is important we don't lose sight of the fact we will get through this and our economy and financial markets will recover." Although Australia is facing a very serious situation, it is temporary. To help get to the other side, the RBA and government are building a bridge in the form of monetary and fiscal measures.
The latest cut to the cash rate brings the cumulative declines over the past year to 1.25%. This is substantial and is boosting the cash flow of households and businesses. Central Banks in Australia, New Zealand, the US and the UK have now all effectively cut cash rates to 0.25%.
Lowe said that rates are likely to be at current levels for some time. Before the virus hit, Australia was expecting to make progress towards the full employment target, but this objective will now take longer to hit. Significant job losses are anticipated, Lowe warned, but a recovery is expected once the virus is contained. When recovery does come, it will be supported by a low level of interest rates, which will be maintained until job and inflation rate objectives are firmly in sight.
How the government and RBA are supporting the economy
The RBA's major focus is to support jobs, incomes, and businesses so that when the crisis recedes, the country is well placed to recover. The Federal Government has so far announced $17.6 billion in coronavirus relief and is set to announce additional measures imminently.
Thus far, one-off stimulus payments of $750 apiece have been announced for low-income Australians, while small and medium-sized businesses will receive up to $25,000 to cover the cost of employee wages and salaries.
The government has allocated $3.9 billion in incentives to encourage businesses to spend, as well as wage subsidies for apprentices. A $1 billion fund has been established to support regions most severely affected by the outbreak, such as those that rely on tourism for income. Relief measures for airlines valued at some $715 million have also been announced.
The Government and Reserve Bank are working in tandem to support the economy and help businesses survive the next few months. The scale and effectiveness of their actions will largely dictate the speed and size of a recovery. Although unemployment is forecast to increase to 7% this year, Australia is in a stronger position than many countries to respond to the current crisis.
