New Record Low: Cash Rate Drops Amid Virus Threat

The RBA has announced that they will be easing monetary policy, dropping the official cash rate to a new record low, 0.50%.

This follows the bank’s last record breaking cut to 0.75% in October last year. The move is believed to be a direct response to January’s unemployment figures, as well as the on-going economic impact of the Coronavirus outbreak.

According to new ABS Labour Force data there has been a growth in unemployment. While in December we saw a well-received drop (5.1%), over January it has moved back in the wrong direction, increasing by 0.2pts to 5.3%.

Meanwhile the Coronavirus outbreak does not appear to be getting any better. Coronavirus is already severely affecting the tourism and education sectors. 

At a conference in Canberra last week, Prime Minister Scott Morrison acknowledged the threat the virus could have on Australia now that it is so widespread.

“We believe the risk of a global pandemic is very much upon us,” he said.

“We need to take the steps necessary to prepare for such a pandemic.”

When speaking on the possible impact of the Coronavirus, Treasurer Josh Frydenberg has said that it will be worse than the bushfires.

"The message is very clear, the impact will be more significant than the bushfires, and it plays out more broadly across the Australian economy," Mr Frydenberg said.

What will happen if interest rates get any lower?

After today’s cut, there isn’t much more room to move.

Once the cash rate reaches 0.25% (and assuming the economy does not get any better) many believe the next step will be quantitative easing, a form of unconventional monetary policy that is often likened to ‘printing money’.

Quantitative easing would see the reserve bank buying bonds from the government and/or the corporate sector in order to inject an influx of money into the economy.

Words by Kathryn Lee

Sources:

·         ASX 30 Day Interbank Cash Rate Futures

·         RBA minutes February 2020

·         ABS Labour Force Figures January 2020

·         ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

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