The Reserve Bank of Australia (RBA) has taken the step of slashing the cash rate to the unprecedented low of 0.50% at today’s board meeting.
Interestingly, just as late as last week, many economists and market watchers were of the belief that interest rates would be kept on hold at this meeting. It goes to show just how much can change in one week – as by Monday morning, the situation changed drastically after the ASX200 lost 10% of its value and $44 billion was wiped off the share market.
Online bookmaker Sportsbet priced the odds of a 0.25% rate cut at $1.20, all but confirming that a reduction was on the cards.
This is a case of the RBA taking swift action in response to the evolving impact of the coronavirus (COVID-19) and its massive effect on global commerce.
“The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected,” said Philip Lowe, Governor: Monetary Policy Decision.
“Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end. It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path. Policy measures have been announced in several countries, including China, which will help support growth.”
Whilst none of us could have foreseen that an international virus outbreak would happen, we now have to be prepared for more volatility ahead.
The coronavirus outbreak has come on the back of the bushfires, which has the potential to push the economy even further backwards over the weeks and months ahead.
With so much uncertainty from a global perspective – China is all but closed for business, Japan has taken the unprecedented step of closing their schools for a month, and the sharemarket is seeing “stay at home” stocks like Netflix prosper while people prepare to shut themselves inside – we may see another cut to the cash rate in the next few months.