Rate cuts to aid recovery
But full impact of virus still uncertain, says RBA
THE Reserve Bank is reluctant to speculate how deeply the coronavirus will hurt Australia’s growth beyond the March quarter, but suggests interest rate cuts and mining investment will at least help cushion the blow.
Deputy Governor Guy Debelle yesterday said a record low interest rate would support a post-virus recovery in spending even if households were reluctant to part with their cash as the virus spreads.
“They may not spend it straight away, but it brings forward the day when they will be comfortable with their balance sheets and resume a normal pattern of spending,” Mr Debelle told the Australian Financial Review Business Summit in Sydney.
The bank cut the cash rate to a record low 0.5 per cent on March 3 to help buttress the economy against the impact of the coronavirus outbreak and is widely expected to make it back-to-back cuts next month.
That would take the interest rate to a new record low 0.25 per cent and pave the way for alternative policy measures such as quantitative easing.
Mr Debelle (above) reiterated that the central bank expected the virus will deliver a 0.5 per cent hit to GDP via the education and tourism sectors alone in the three months to March, but the rapidly evolving nature of the outbreak meant a midterm outlook was hard to quantify.
“Clearly we are still only in the early weeks of March, so the picture can change from here,” he said.
“It is just too uncertain to assess the impact of the virus beyond the March quarter.”
Mr Debelle said the bank’s business liaison program was gathering information on supply-chain disruptions to the local construction and retail sectors.
Coal consumption and traffic congestion indexes in China showed that the Chinese economy was only now gradually returning to normal. “Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains,” Mr Debelle said.
However, the central bank’s liaison with the resources sector does not indicate any material disruption to exports of iron ore and coal at this stage. “Indeed, iron ore and coal prices have been resilient,” he said.
“Disruptions to Chinese domestic production of iron ore and coal have been a factor in this, which has resulted in more use of imported resources ... Another is the expectation that the Chinese policy response will involve a significant amount of infrastructure spending which will benefit bulk commodities.”