While the bank appeared to be reluctant to cut rates following its successive cuts last year – governor Philip Lowe had previously foreseen a “gentle turning point” in the economy – the coronavirus forced its hand at its March meeting.
“As part of their deliberations, members considered a number of scenarios, including one where the COVID-19 outbreak would be contained in the very near future and where there would be a rapid recovery in economic activity,” the RBA wrote in the minutes of its March meeting.
“In that scenario, the maximum effect of any additional monetary policy stimulus would be felt in the recovery phase, rather than in the short term, when policy support would most be needed. However, this scenario was considered very unlikely, with the more realistic scenario being that the outbreak would have a significant effect on the Australian economy.”
The RBA now believes that the coronavirus will have a significant impact on the Australian economy, despite the incoming fiscal stimulus packages promised by the Morrison government.
“GDP growth in the March quarter was likely to be noticeably weaker than previously expected, and it was difficult to predict how long it would take for the economy to return to more usual levels of activity,” the RBA said.
“Once the disruptions passed, GDP growth was expected to pick up, supported by the low level of interest rates, high levels of spending on infrastructure, the lower exchange rate, stronger investment in the resources sector and recoveries in residential construction and household consumption.”
The RBA’s meeting came prior to the global market rout that has characterised the last week, and the bank noted that “international financial markets were functioning effectively despite a sharp rise in volatility”.
The minutes were released as the RBA prepares to meet on Thursday, weeks ahead of its usual April meeting, in a move that could see them launch a quantitative easing program to help avert a crisis in Australian markets.
“The Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system,” governor Lowe said in a statement.
