RBA interest rate cut looms as coronavirus topples global share markets

As fears surrounding the coronavirus outbreak take a devastating toll on global share markets, it’s becoming increasingly likely that the Reserve Bank will cut official interest rates in its March meeting tomorrow.

As recently as a week ago, financial markets were confident the RBA would hold until April — or May at the very latest. But as the potential effects of the virus on global economic activity begin to crystallise, many are revising their forecasts. 

Even before the reality of the outbreak had set in, there were plenty of signs the Australian economy was lagging. The latest jobs report showed unemployment bouncing up to 5.3% in January, and parts of the country are still reeling from the effects of the bushfires. But when the board convenes tomorrow, those issues will likely take a back seat.

“The bushfires have definitely had a suppressive effect on the economy, but it’s not at the kind of scale that coronavirus seems it’s going to be, because that’s breaking supply chains around the world,” said Mozo’s banking expert Peter Marshall.

Are things really that bad?

Despite efforts to contain it, the virus outbreak has wreaked havoc on Chinese business activity. Production across the country has come to a screeching halt, with the PMI manufacturing index falling from 50.0 in January to a record low 35.7 in February. 

That’s seen share markets around the world take a severe beating. The Dow Jones Industrial Average and the S&P 500 recorded their steepest declines since the financial crisis of 2008, while the ASX200 has plummeted more than $200 billion in value.

“It’s only a couple of weeks ago that share markets were hitting new highs, and that’s kind of the time to hit the panic button. It’s usually soon after that the crash comes, and it seems that the coronavirus was just the trigger needed for a bit of a reset in equity markets,” said Marshall.

US Fed strengthens case for a cut

Chances the board would drop rates to 0.50% received a boost after the head of the US Federal Reserve, Jerome Powell, recently indicated a willingness to cut rates in light of “evolving risks” to the US economy.

“I think that one of the major factors that the RBA will be considering when it meets tomorrow is the US Fed is now expected to go by as many as 50 basis points when it meets in a couple of weeks,” said Marshall.

“So it would seem quite risky to not move tomorrow, as being out of step with the US Fed will drive the Australian dollar up and decrease our export competitiveness at a time when other industries like tourism and education are already suffering quite a lot.”

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