Analysts are now predicting the Reserve Bank of Australia will cut the cash rate from the already-historic low of 0.75 per cent to 0.5 per cent when it meets tomorrow afternoon.
Australia’s official cash rate has remained at 0.75 per cent since October 2019 following two earlier rate cuts that year.
Pundits have long claimed a further rate cut within the first half of 2020 was all but inevitable, but the ongoing coronavirus crisis has accelerated the urgency.
Last week, the S & P 500 experienced its worst week since the financial crisis with more than $US6 trillion in value wiped, while the ASX also lost billions.
According to IG market analyst Kyle Rodda, there was now an 87.5 per cent chance of a rate cut tomorrow, with two cuts by October widely expected.
“Leading into the close of US trade, it became considered close to a certainty that the RBA will cut rates on Tuesday,” he said.
“The move was dramatic, with the implied odds of a rate cut from the RBA only 7 per cent two days earlier. That drove the Australian dollar to fresh lows on Friday night.”
He said the “AUD/USD temporarily traded at 0.6440 in US trade” as markets forecast the RBA will cutting rates by the end of the year.
It is a sentiment echoed by a slew of other economists who believe the RBA may be pushed into slashing rates tomorrow in a bid to soften the impact of a potential virus-fuelled global recession.
JP Morgan chief economist Sally Auld has previously said 2020 rate cuts were almost a certainty, but they could now come sooner than expected.
“I think the risk is now that those come earlier than we had forecast, potentially as soon as (this) week,” Ms Auld told ABC television on Sunday.
“As the days and the weeks go on, it becomes very clear that the hit to growth here is probably going to be reasonably significant.”
The Morrison Government has already indicated it will take “targeted action” to support parts of the economy that have felt the initial impact of the virus, and shadow treasurer Jim Chalmers is open to a stimulus package to assist the impact of the virus but argues the economy has been in desperate need of support for some time.
But not everyone is convinced a rate cut is the best course of action.
The Australian National University’s RBA shadow board said the official cash rate should remain at 0.75 per cent in the face of global concerns and market slumps caused by coronavirus.
The shadow RBA noted weak wage growth and persistently low inflation were also strong reasons for rates remaining unchanged.
“Fear about a global coronavirus pandemic are already taking their toll on world financial markets and are likely to impose significant economic costs on the Australian economy, should the crisis worsen,” RBA shadow bard chair Dr Timo Henckel said.
“Tepid wage growth, a slight increase in the unemployment rate and an inflation rate that remains below the Reserve Bank of Australia’s official target range of 2-3 per cent all point to economic weakness.
“And according to the latest quarterly data, a key variable for gauging inflationary pressures as well as the outlook for consumption expenditure, real wage growth, remains worryingly low at 0.4 per cent year on year.”
Meanwhile, the US Federal Reserve has indicated it will cut its benchmark this month – and AMP Capital head of investment strategy Shane Oliver told The Australianit was likely the RBA would also cut Australia’s official cash rate.
“The US Fed is effectively signalling it will cut rates in two weeks’ time, and if the biggest central bank in the world is worrying then we should be worrying as well,” he told the publication.
“Against the background of already weak economic growth and the threat of further weakness to come, the benefits of another interest rate cut, which includes keeping the dollar down, likely outweigh the costs.”
– with wires
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