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The Reserve Bank of Australia (RBA) has lowered the official cash rate by 25 bps from 0.75 per cent to 0.5 per cent – marking the fourth cut since June 2019 when the easing cycle commenced.
This follows a sharp turnaround in sentiment ahead of the RBA’s monetary policy board meeting, with analysts initially expecting the central bank to keep rates on hold.
According to the ASX’s RBA Rate Indicator, the proportion of those predicting a cut jumped from 18 per cent on Friday (28 February) to 100 per cent on Monday (2 March).
In recent weeks, RBA governor Philip Lowe adopted a more hawkish tone regarding the state of the Australian economy, in light of stronger than expected labour market and inflation data, prompting the central bank to hold the cash rate in February despite initial expectations of a cut.
However, developments in the domestic and global economy are likely to have altered the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak rattling market confidence.
Among the analysts to forecast a cut was AMP Capital’s chief economist Shane Oliver, who observed: “The run of economic data since the last RBA meeting has mostly been soft with falls in retail sales, construction and business investment, weak confidence readings, continuing poor wages growth and a rise in unemployment and underemployment which in total were already high.”
“December quarter GDP is likely to show a renewed slowing in quarterly GDP growth.
“The bushfires and the coronavirus will likely take the economy backwards this quarter with significant uncertainty around the duration of the hit from coronavirus.
“We were already a long way from the RBA’s full employment and inflation objectives and developments over the last month have likely taken us further away from them.”
Mr Oliver added that recent signalling from the RBA’s foreign counterparts of further easing would also compel the RBA to lower rates in order to keep the Australian dollar from inflating.
“If the RBA doesn’t ease and then the [Federal Reserve] cuts in two weeks’ time as now looks likely then the Australian dollar will likely rise which the RBA will want to avoid,” Mr Oliver said.
“Against the background of already weak economic growth and the threat of further weakness to come, the benefits of another interest rate cut – which also include keeping the [Australian dollar] down – likely outweigh the costs and so the RBA should be easing again.
“I get the feeling that the RBA would probably prefer to wait a bit longer – to better assess COVID-19’s impact [and to] see if there is a more ‘material’ rise in unemployment [but] things are moving fast around the threat from coronavirus with very sharp falls in share markets warning that the threat to the growth outlook is very serious.”
According to managing director of mortgage aggregator Finsure John Kolenda, the RBA’s decision may not have an immediate impact on the economy but would help restore some confidence.
“The RBA lowering rates again is an understandable response to the coronavirus crisis and will hopefully provide some confidence to the economy,” Mr Kolenda said.
“Unemployment rose last month, and we are still dealing with the impact of the devastating bushfires over the summer. The RBA, fortunately, still has some fuel in the tank to support the economy.”
Mr Kolenda stressed that despite weakness in some economic indicators, the fundamentals of the domestic economy remain “solid”.
“Consumers should not be too alarmed by the negativity,” he said.
“The whole world is having to deal with the coronavirus, with our retail businesses and travel industry being hit on a number of fronts. Some parts of the economy are doing it very tough while others are ticking along.”
The managing director added that current conditions would likely stimulate property market activity, as investors look for stock market alternatives.
Mr Kolenda concluded by noting that interest rates would likely remain lower for longer, potentially for the rest of the decade.
Attention will now turn to Australia’s lenders, who are expected to respond to the RBA’s decision with mortgage rate reductions.
According to CoreLogic’s head of research, Tim Lawless, this latest cut from the RBA would not trigger a surge in home loan demand, with lenders unlikely to pass on the rate cut in full and with sentiment affected by the coronavirus outbreak.
“Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however there is less certainty that this will add fuel to the housing market in the current economic climate,” he said.
“This is partly because the latest rate cut is unlikely to be fully passed on to mortgage rates.
“Furthermore, a low cash rate coupled with concerns around the global spread of coronavirus, has the potential to spook consumers and drag confidence lower. Buying or selling a home is a high commitment decision; if consumer confidence slips further from already low levels, we could see Australian households sit on their hands rather than decide to buy or sell, which would weigh on market activity.”
Mr Lawless added that weakened confidence in the housing market could serve as a further risk to economic stability.
“Considering the housing sector has been one of the few positive areas of the Australian economy, a slowdown in housing market conditions could add to the downwards pressure on economic growth that is expected over coming months as key industry sectors such as tourism, education and commodity exports are impacted by the coronavirus outbreak.”
However, Loan Market executive chairman Sam White noted that brokers would ease borrower concerns by assisting them into lower mortgage rates.
“Brokers will be highlighting scenarios for repricing or refinancing with their customers, this week, following the RBA’s 25 basis point cut to the cash rate, taking it to a new official low, today,” he said.
“Customers have felt uncertain this week as the global market responds to COVID-19. But what they can have certainty of, is that their broker is saving them time and money by securing the best interest rate or product for their needs, in the current marketplace.”
[Related: Shaky markets, looming Fed cut, to force RBA’s hand]
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