With a large hit to the Australian economy becoming increasingly likely as coronavirus continues to rampage across the globe, all eyes are now on the RBA. While governor Lowe and the board had previously seen evidence of a “gentle turning point” in the economy, the total impact of the coronavirus remains unclear – something that the RBA touched upon at its February meeting, where it decided to hold rates at 0.75 per cent.
“The coronavirus outbreak was a new source of uncertainty,” read the minutes of that meeting.
“While it was too early to tell what the overall effect would be, the outbreak presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy.”
But despite the potential impacts of the coronavirus – and the economic damage already wrought by the bushfires – the RBA is still expected to hold in March, with both the ASX Rate Indicator and the Finder cash rate survey predicting that the bank will not cut rates. Members of the Australian National University Shadow Board – which provides its own commentary on interest rate cuts – have also said that the RBA should hold in March.
“There will be noticeable negative macro-economic effects from the overreaction by governments to the latest flu variant,” said Jeffrey Sheen, a Professor in ANU’s Department of Economics.
“Temporary fiscal support is required and being applied. Until more macro-economic information becomes available, the historically low cash rate should not be adjusted.”
The outside possibility of the RBA embracing a quantitative easing program, which governor Lowe confidently dispelled last year, now seems much more likely, with a possibly prolonged closure of China’s manufacturing hubs likely to hit demand for Australian commodities hard.
However, the federal government may also step in with “targeted, modest, and scalable” fiscal measures, meaning the RBA might not be forced to take extreme measures to ensure the stability of the Australian economy.
“We are quite aware of where the virus is impacting in particular sectors more than others,” Prime Minister Scott Morrison told a press conference in Canberra last week.
“Obviously, in the travel sector it’s having a very big impact, in the education sector, but also as I mentioned the other day the impact of supply chain breakdowns, not just now between Australia and China, but in a more broader global pandemic stage those impacts would also be quite relevant.”
