‘Too early’ to guess virus hit past March: RBA

Alex Druce
(Australian Associated Press)


The Reserve Bank is reluctant to speculate how deeply the coronavirus will hurt Australia’s growth beyond the March quarter, but suggests interest rate cuts and mining investment will at least help cushion the blow.

Deputy Governor Guy Debelle on Wednesday said a record low interest rate would support a post-virus recovery in spending even if Aussie households were reluctant to part with their cash as the virus spreads.

“They may not spend it straight away, but it brings forward the day when they will be comfortable with their balance sheets and resume a normal pattern of spending,” Mr Debelle told the Australian Financial Review Business Summit in Sydney.

The bank cut the cash rate to a record low 0.5 per cent on March 3 to help buttress the economy against the impact of the coronavirus outbreak and is widely expected to make it back-to-back cuts next month.

That would take the interest rate to a new record low 0.25 per cent and pave the way for alternative policy measures such as quantitative easing.

Royal Bank of Canada’s Sydney branch noted Mr Debelle’s suggestion that any quantitative easing measure would likely focus on price rather than quantity when setting the ‘objective’ for yields.

“This is effectively yield curve control,” RBC said in a note.

“The aim would be to keep risk-free rates low for a sustained period to assist in achieving its inflation and employment objectives.”

Mr Debelle, the RBA’s second-in-command, was expected to talk about investment at the Sydney conference on Wednesday.

Instead he gave the bank’s view of the local and global economy as the virus spreads to more countries.

Mr Debelle reiterated that the central bank expected the virus will deliver a 0.5 per cent hit to GDP via the education and tourism sectors alone in the three months to March, but the rapidly evolving nature of the outbreak meant a mid-term outlook was hard to quantify.

“Clearly we are still only in the early weeks of March, so the picture can change from here,” he said.

“It is just too uncertain to assess the impact of the virus beyond the March quarter.”

Mr Debelle said the bank’s business liaison program was gathering information on supply-chain disruptions to the local construction and retail sectors, but the picture remained unclear.

Coal consumption and traffic congestion indexes in China showed that the Chinese economy was only now gradually returning to normal.

“Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains,” Mr Debelle said.

However, the central bank’s liaison with the resources sector does not indicate any material disruption to exports of iron ore and coal at this stage.

“Indeed, iron ore and coal prices have been resilient,” Mr Debelle said.

“Disruptions to Chinese domestic production of iron ore and coal have been a factor in this, which has resulted in more use of imported resources … Another is the expectation that the Chinese policy response will involve a significant amount of infrastructure spending which will benefit bulk commodities.”

In the meantime, the virus continues to spread to other countries.

More than 110,000 people have been infected and 4,000 killed worldwide since it surfaced in China late last year, decimating travel and tourism industries, smashing supply chains and hammering financial markets.

Australia’s number of cases rose overnight from 80 to 100, with a Northern NSW uni campus shutting its doors and Tasmania’s Dark Mofo festival cancelled to stall the spread.

“(Other nations) too are beginning to suffer significant disruptions, the extent and duration of which is unknown at this time,” Mr Debelle said.

“The conclusion is that the global economy will be materially weaker in the first quarter of 2020 and in the period ahead.”

Mr Debelle noted that the RBA was right in its prediction the economy was on the improve before disruption from the summer’s bushfires and the virus, and tipped the eventual recovery to be supported by low interest rates.

A lower exchange rate, a rise in mining investment, infrastructure spending and an expected recovery in residential construction will also contribute to an eventual recovery, he said.

Meanwhile, Treasurer Josh Frydenberg met with bank CEOs on Wednesday to discuss the impact of the virus on the economy.

Australian Banking Association chief Anna Bligh said banks were in the “best-ever shape” to face the challenge and were well capitalised, with strong balance sheets.

“Banks stand ready to assist and if anyone is in need of assistance, they shouldn’t wait to come forward,” she said.

The federal government said free telehealth services and pop-up testing clinics will be set up as part of a $2.4 billion health response to the outbreak.


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