OPINION: Would RBA Go Hard, Lower Cash Rate By 50bps Tue?

• Published on
• 02 Mar 2020, 12:36 PM

By Sophia Rodrigues

There is a case for the Reserve Bank of Australia to lower the cash rate by 50 basis points on Tuesday.

The last occasion the RBA delivered a cut of 50bps or more was in May 2012 and prior to that, it was during the global financial crisis. In May 2012, the rationale behind a deeper cut was that banks would pass through less than half of a 25bps cut, if only 25bps cut was delivered During GFC, it was the steep rise in funding costs caused by the paralysis in credit markets.

This time the reason is different. The coronavirus outbreak is already pandemic-like and hence a crisis-like situation with direct impact on the markets and the economy. It is happening at a time when Australia’s growth outlook is already weak due to bushfires and the drought.

This means the RBA would go into the board meeting Tuesday with reasonable assessment of how deeply coronavirus would hurt the economy.

The data from China was very weak during the weekend, and market is certain the Fed will deliver a bigger 50 basis points cut later this month.

Also, the RBA is meeting with the heads of the Council of Financial Regulators later today where they are expected to discuss the impact of coronavirus on the markets and the economy, and discuss responses. This could include fiscal stimulus. But the first line of action would be from the RBA.

I am reminded of RBA Deputy Governor Guy Debelle’s words. “Timely policy responses are effective. In a crisis, go fast and go hard. Don’t die wondering.”

A fast and hard response from the RBA would be 50bps on Tuesday. Will they go 50?

Contact: Sophia@centralbankintel.com