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Coronavirus lowers interest rates in Australia

Central banks around the world report an aggressive effort to cushion the impact of the coronavirus on the global economy, starting with Australia where a 28-year streak of no recession is likely to run aground .

The challenge for central bankers is that they lack firepower after stimulus packages launched in recent years have sought to protect economies from trade wars, geopolitical tensions and the impact of impact low inflation. Some have called on governments to increase spending, but have faced resistance as many legislators have spent a decade trying to reduce debt.

Tuesday, the Reserve Bank of Australia cut interest rates by a quarter point to a record low of 0.50% after the coronavirus began to stifle key exports, including education and tourism abroad. Just a few days ago, markets were forecasting a 15% drop in Australian rates, but that changed after Federal Reserve Chairman Jerome Powell said on Friday that the central bank was ready to act to protect the bank. American economy against the virus and Chinese. economic indicators were much weaker than expected.

The coronavirus has clouded the short-term outlook for the global economy and means that global growth in the first half of 2020 will be weaker than expected, said Philip Lowe, the governor of the RBA.

The virus has infected more than 80,000 people worldwide and killed more than 3,000 people, disrupting global supply chains and severely shaking stock markets. The death toll in the United States has risen to six, with the number of confirmed cases increasing rapidly outside of China in the past week. In the last day, South Korea, Italy and Iran each reported more new cases than China.

Oxford Economics, a UK-based quantitative forecasting and analysis company, has said that the economic disruption in the spread of coronaviruss will be bigger, wider and more lasting than it previously anticipated. He had forecast 2.3% growth in global gross domestic product this year, but now believes that estimate is too optimistic.

Powells said on Friday that the Federal Reserve is ready to cut interest rates to cushion the US economy against the effects of a possible public health emergency and a slowdown. increasingly marked global market, followed by other signs of easing from global central banks.

We are ready to take appropriate and targeted measures as necessary and to measure the underlying risks, said Monday the President of the European Central Bank, Christine Lagarde.

Finance ministers from the Group of Seven countries are scheduled to hold a telephone meeting on Tuesday to coordinate their response to the coronavirus. There will be concerted action, said French Finance Minister Bruno Le Maire.

However, it is unclear what measures can be taken, as many central banks have limited flexibility with key rates. The key rate of the ECB is already below zero, minus 0.5%. Short-term rates in Japan are also in negative territory, the

Bank of Japan

proposed Monday to lend 500 billion yen ($ 4.6 billion) in two-week funds to financial companies.

The Fed has more firepower to protect the expansion of the United States over the decade. The money markets announced an aggressive drop of half a percentage point by the Fed following its March 18 general policy meeting. The Bank of Canada is also expected to cut rates this week, said Sydney chief Su-Lin Ong. of RBC Capital Markets' market strategy.

However, further easing is also likely to fuel further speculation on real estate and other risky assets. Last year, three rate cuts in Australia helped reverse the downturn in its housing market, as house values in Sydney increased 11% in the 12 months to February

CoreLogic

the data showed this week.

RBA Governor Lowe said the impact of the coronavirus was already being felt by the Australian economy, with GDP growth in the three months to March likely being weaker than the central bank never expected. Domestic spending is also likely to be affected.

Given the changing situation, it is difficult to predict the magnitude and duration of the effect, said Mr Lowe. The RBA was ready to ease monetary policy again if necessary, he added.

It is not the first time that the Reserve Bank of Australia has set the tone for the actions of the World Central Bank. The central bank fell by 1 percentage point in October 2008, responding to the fallout from the collapse of Lehman Brothers Holdings Inc. a month earlier.

Write to James Glynn at [email protected]

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