RBA Has So Far Estimated Coronavirus Impact On GDP Only from Tourism, Education Hit

By Sophia Rodrigues

The Reserve Bank of Australia has estimated the impact of coronavirus on GDP based on its effect on tourism and education, and hasn’t taken into account the flow-on impact on other parts of the economy yet.

Based on the impact on tourism and education, the RBA’s current estimate is that it will subtract 0.5% from GDP in Q1, Deputy Governor Guy Debelle said at the Economics Legislation Committee hearing late Wednesday.

The RBA’s estimate is that services exports would fall by 10% in Q1 and because it accounts for 5% of GDP, it would take off 0.5% from growth, Debelle explained.

Debelle stressed that these are estimates “for the time being,” while also noting that there’s still around one month of Q1 to go.

He acknowledged that the RBA is hearing about supply chain disruptions in the construction and retail sectors but is not in a position to assess its impact or know how long lasting it will be.

At the hearing, Debelle reiterated that the zero lower bound for the cash rate is 0.25%. “We don’t think negative rates would be appropriate for us,” he said.

The RBA thus has the capacity to reduce the cash rate by 25bps to 0.25%, and would consider quantitative easing if further stimulus is required. The aim of QE would be to bring down risk-free rate, Debelle said, even as he noted that bond yields are at historic lows.

Debelle disagreed that the impact of monetary policy on the economy is diminishing. The RBA still thinks monetary policy is effective because lower interest rate is providing more cashflow to borrowers and is also having effect on the exchange rate, he said.

--Contact: sophia@centralbankintel.com