RBA holds recession fear

Contraction expected in March and June quarters

RESERVE Bank board members decided it was likely that Australia’s economy would shrink across the March and June quarters – and potentially even longer – when it cut the cash rate to a record low 0.25 per cent to fight the impact of coronavirus.

RBA governor Philip Lowe (right) did not use the word “recession” after the ad hoc March 18 board meeting but minutes show members agreed it was likely the coronavirus crisis would result in at least two back-to-back quarters of contraction.

This is the technical definition of a recession, something Australia has not seen since the early 1990s.

The RBA neglected to give an official growth forecast when it launched its suite of economic support measures a fortnight ago but it did tip significant job losses.

“While it was not possible to provide an updated set of forecasts for the economy given the fluidity of the situation, it was likely that Australia would experience a very material contraction in economic activity, which would spread across the March and June quarters and potentially longer,” minutes from the March 18 meeting show.

“The size of the fall in economic activity would depend on the extent of the social distancing requirements, and potential lockdowns, put in place to contain the virus.”

The RBA’s first out-of-cycle meeting since 1997 involved lowering the interest rate to 0.25 per cent, where it is expected to remain “for some time”.

Members acknowledged that very low interest rates would have a negative consequence for some people, especially those relying on interest income, but the evidence was that recent cuts were benefiting the community as a whole. The RBA had already reduced the cash rate to 0.5 per cent at its regular March board meeting.

The widely anticipated March 18 emergency rate cut meant the central bank also pulled the trigger on its first quantitative easing program to boost cash supply and encourage lending and investment.

Dr Lowe said the RBA would buy Australian government bonds in the secondary market, with a target yield on three-year bonds of about 0.25 per cent. It also created a $90 billion lending facility to banks for small and medium businesses, adding to a $15 billion loan scheme for small and medium lenders that had just been announced by the Federal Government.

Australia has more than 4500 coronavirus cases.