Cash rate slashed to record low as Covid-19 continues to put strain on economy

The Reserve Bank of Australia has slashed the cash rate for the second time in one month, citing the major impact that the ongoing Covid-19 crisis is having on the economy, both at home in Australia and globally, as the key factor.

Announcing the off-calendar rate cut on Thursday, Governor Philip Lowe said that while coronavirus is primarily a health issue, the ongoing situation is continuing to take its toll on the financial system, leaving the RBA with no option but to lower interest rates to a record low of 0.25.

“As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within countries and within cities,” he said in a statement. “The result has been major disruptions to economic activity across the world.”

He added: “This is likely to remain the case for some time yet as efforts continue to contain the virus.”

Lowe assured the public that the economy will recover, however pointed out that today’s decision is vital in reducing economic and financial disruption resulting from the virus, as the current financial climate is plagued by high market volatility, large declines in equity prices and historically-low government bond yields.

Today’s announcement is the first unscheduled cash-rate decision by the RBA since 1997, when the central bank cut rates twice, from 6.0 percent to 5.5 percent in May, then from 5.5 percent to 5 percent in July.

The cut was delivered alongside a series of measures designed to help Australia minimise the economic damage caused by coronavirus. The measures included the introduction of a three-year funding facility for Australian banks to allow the banks to lend more easily to small and medium-sized businesses, and a buy-back program in which the RBA would buy Australian government bonds to help “address market dislocations”.

Lowe also said that that government bond markets had not been functioning properly, which had in turn disrupted other financial markets that use bonds as a financial benchmark.

The RBA’s move came after unemployment figures for February came in better than expected at 5.1 percent, down from 5.3 percent. But those numbers covered a period before Covid-19 had started to wreak damage on the economy and economists at Westpac said today that they expected unemployment to surge to 7 per cent by October.

Westpac’s widely respected Chief Economist Bill Evans last week predicted Australia would go into a recession in 2020, despite the economic stimulus announced so far by the federal and state governments. Evans said he expected the recipients of the $750 one-off cash bonus to save the money rather than spend it.

The RBA cut also coincided with the announcement by national carrier Qantas that it would stand down 20,000 workers – equivalent to two-thirds of its workforce – from late March to the end of May, after demand for flights plunged in the wake of virus-related travel restrictions. CEO Alan Joyce said that the decision to put employees’ jobs on hold was one Qantas had to make in order to ensure the company didn’t collapse as a result of the huge drop in revenue it was suffering.