RBA cuts due to coronavirus
The Reserve Bank of Australia (RBA) has cut rates by 25 basis points to a new low of 0.5%, the fourth cut since last June, and are the first major central bank outside of China to respond to the coronavirus outbreak.
Shane Oliver, AMP Capital chief economist, said some banks had passed the rate cut on in full, taking standard variable mortgage rates to the lowest since the early 1950s.
“Rate cuts won’t kill the virus or solve supply side constraints but they will help ease the pain for borrowers through this uncertain period and will help boost growth once the virus is under control,” Oliver said.
Kerry Craig, global market strategist at JP Morgan Asset Management, said clear downside risks to the growth and inflation outlook meant the market will look for further cuts this year.
“The weakness in domestic demand and failure of the three rates cuts last year to lift corporate and consumer sentiment had already created a case for further easing by the RBA this year, the COVID-19 virus has just accelerated the process,” Craig said.
“The 25bps cut today may have disappointed those looking for 50bps, but this is a prudent move by the RBA given the vast number of unknowns about the virus and how fast and far it could spread.”
Peter Gardner, portfolio manager at Plato Investment Management, said real yields on cash, bonds and term deposits are already negative and this cut can only make life more difficult for self-funded retirees.
“Whilst the rate cut may provide some further relief for borrowers and businesses provided banks pass through the reduction, it will make life yet more difficult for retirees struggling to live off the income from their cash linked investments,” Gardner said.
“Many income-related products, like income securities or bank hybrids, are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall more than 30 basis points this year, which is already crimping their income.”
Anthony Doyle, cross-asset specialist at Fidelity International, said the economic benefit of today’s interest rate cut on the real economy is questionable.
“What does this mean for investors? The RBA is one of the first central banks of the developed economies to act, but it is likely that both developed and emerging market central banks will look to ease monetary policy and expand asset purchase programmes in coming months to cushion the blow that corona virus has had on both the supply and demand side of their respective economies,” Doyle said.
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