The RBA has slashed interest rates in response to the coronavirus


The RBA has slashed interest rates in response to the coronavirus
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The RBA has made the call that they predict the coronavirus will significantly impact the economy going forward, and has thus moved to preempt the fallout.

The RBA Board, led by Governor Phillip Lowe, decided to cut the official cash rate by 0.25% to a record-low 0.5%. Rates that have not been seen since the 1950’s in this country.

Headed into the announcement today, there has been significant market volatility, with futures markets pricing in a 100% chance of a 25 bp cut prior to the RBA release. However, calls from both analysts and economists are mixed, with many fearing the RBA is acting too hastily.

RBA Governor Phillip Lowe said the move was made in response to the impact the coronavirus would likely have on GDP and employment.

"The Board took this decision to support the economy as it responds to the global coronavirus outbreak," said Mr. Lowe.

"The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors.”

“The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity.”

Australia to shake-off the virus

Steve Mickenbecker, Group Executive, Financial Services at Canstar feels that the RBA is simply trying to get ahead of any fallout from the virus.

“The RBA made this move because of the coronavirus and it’s immediacy. If you look at Australia’s big three areas of the economy they are resources, education and tourism and all three have taken it well and truly on the chin.”

“So the economy will take a hit in the short-term and the RBA is simply trying to get ahead of the curve.”

Mr. Mickenbecker suggests that while the RBA is trying to proactive, given where interest rates currently sit, today’s cuts will have limited benefit.

“My view is that this won’t have much of an impact on the economy, given where rates already are. I think it’s highly unlikely that businesses are going to go out and start allocating more capital and consumers will likely not spend more. And borrowers will just pay off their loans and not spend.”

For property markets, Mr. Mickenbecker believes the coronavirus won’t have any long-term impacts at all.

“Property is the easy one at the moment and I think it’ll be fine. We’re already seeing strength in the property market and I expect that to continue.”

There are already a number of banks passing on the full 0.25% cut and this was a shock to Mr. Mickenbecker.

“I was very surprised to see Westpac come out and pass on the full 25bp cut within 10 minutes. Last time around the big banks only passed on 0.14% of the 0.25% reduction in rates, so it is a change for them.”

Metro markets to outperform regional areas

John Lindeman, chief property consultant at Property Power Partners feels that the coronavirus will hurt the economy in the short-term.

“The RBA is clearly worried not so much by the coronavirus itself, but by the potential impact of the global virus. Tourism is going to suffer as well as exports to China. So this will have a very dramatic effect on our economy.”

Mr. Lindeman believes that, given the low level of interest rates and the lag time involved in property, there will be few impacts on metro property markets.

“The property markets move on a quarter by quarter basis, so you don’t see a lot of change, month to month. So I don’t think we’ll see any impact from any of these issues in the next six months in city markets and by that stage people won’t remember what caused it.”

“There’s always a lag because people need to put properties on the market, find buyers, then wait for them to settle. So it’s much more long term and that makes it less severe. So there’s not much for people to worry about.”

However, there could be some additional pressure on regional markets on the back of the recent bushfire crisis and floods.

“I think many regional markets will decline over the next six months. We’ve already had some impact from the bushfires, drought and some flooding. So the coronavirus is just going to make it worse and we probably won’t see a revival in tourism in the short-term.”

East Coast property rebound to continue

Andrew Woodward, founder of The Investor's Way welcomes the RBA move to cut rates and feels the economy needs it.

“I believe the current rate cut will be welcomed by most households, however I am less confident that it will help maintain economic stability in Australia. Our economy has not been growing significantly for some time and with inflation below Government targets at 1.8% it is going to need some stimulus to get it moving.”

Mr. Woodward feels that the latest cut will in fact, be a catalyst for further growth in property prices.

“While the impact on the economy is likely to be minimal, I expect the property market to be a beneficiary of the rate cut. It is likely that those in a position to transact will have more capacity to purchase and potentially push prices up across the country.”

“I expect the Eastern states to see more of this increase, and particularly Sydney and Melbourne as money returns to these markets. While we have seen activity on the increase in recent months, this latest rate cut will likely generate a new flow of money to property and potentially generate a new round of property price growth.”

“Having said that, I also expect that this price growth will not be at boom type rates while international buyers are likely to be less active. It is potentially a good time to be a local buyer, with a little less competition.”

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