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Coronavirus fears force the RBA to cut rates to 0.5%

Fears that the coronavirus will weigh on both the local and global economies has forced the RBA to slash the official cash rate by 25 basis points to 0.5 per cent.

The RBA made the decision to cut interest rates to a record low level in what is the fourth cut in 12 months.

The unprecedented fallout from the coronavirus has seen markets in turmoil over the last week and it appears the RBA is the first central bank to officially respond.

RBA Governor Phillip Lowe said the move was made to counteract the fear that has been driving sentiment.

“The Board took this decision to support the economy as it responds to the global coronavirus outbreak,” Mr Lowe said.

“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors.”

Mr Lowe also suggested the virus would impact GDP growth going forward.

“The uncertainty that it is creating is also likely to affect domestic spending. As a result, GDP growth in the March quarter is likely to be noticeably weaker than earlier expected.”

The economy in need of a boost
Mortgage Choice Chief Executive Officer, Susan Mitchell believes today’s cut has been on the cards for some time.

“Today’s decision marks what could be seen as a coordinated move by central banks around the world as markets speculate that the US Federal Reserve and the European Central Bank are also expected to ease monetary policy in an attempt to shield economies from the effects of Covid-19.

“A global share market rout saw European, Japanese, US and Australian share markets fall last week. The Australian dollar plunged and with the global count of coronavirus cases spreading globally, the current volatility shows no sign of abating,” Ms Mitchell said.

“Putting the recent developments aside, it’s important to point out that the outlook for the Australian economy was not exactly rosy. A number of key economic factors have been building the case for the RBA to cut the cash rate today.”

Finsure Managing Director John Kolenda said while cutting rates again may not immediately boost economic growth, the RBA needs to act to support the economy and restore some confidence.

“The RBA lowering rates again is an understandable response to the coronavirus crisis and will hopefully provide some confidence to the economy,” Mr Kolenda said.

“Unemployment rose last month and we are still dealing with the impact of the devastating bushfires over the summer. The RBA, fortunately, still has some fuel in the tank to support the economy.

“The whole world is having to deal with the coronavirus, with our retail businesses and travel industry being hit on a number of fronts. Some parts of the economy are doing it very tough while others are ticking along.

“In this environment, we are likely to see an increased interest in property as a safe haven with a stock market correction.”

Tim Reardon, Chief Economist at the HIA was pleased the RBA made the decision to cut.

“Today’s decision by the RBA board to lower the cash rate is the prudent course of action,” Mr Reardon said.

“The reduction in the cash rate in 2019 was critical to slowing the decline in the residential building that has been a major drag on economic growth.

“It is now clear that travel and trade restrictions between China and Australia will weigh on the domestic economy. It is prudent to move early to ward-off more significant impacts.”

Property to remain bullish
Ray White Group Managing Director Dan White believes that despite the cuts, the property market wouldn’t be immediately impacted.

“Today’s further rate cut by the RBA is reflective of buyers’ belief that rates will stay low for the foreseeable future,” Mr White said.

“People looking at their next move in the property market are generally unconcerned by such cuts and we believe today’s move will have little impact in this sector.

“The optimism on the ground across the country for both buyers and sellers is palpable right now and that’s highlighted in our auction statistics.”

Cuts being passed on
Westpac has already come out and passed on the full rate cut to some customers while other lenders are also getting in early.

Sally Tindall, research director at RateCity.com.au, believes banks that pass them on should be supported.

“Westpac should be commended for passing on a full cut to their variable rate customers. Hopefully, this will prompt the other big four banks to follow suit.”

“This decision will save the average Westpac home loan customer around $55 a month or $662 a year.

“Some banks may choose not to pass on the full cut, due to pressure on their profit margins. Variable rate customers should call their bank and find out what they intend to do.

“If borrowers aren’t happy with the cut their bank is passing on, they can choose to take their business walking.”

Nathan Walsh, co-founder and CEO of Athena Home Loans, feels the big-four should be all passing on the cuts.

“For the fourth time in a row, Athena has immediately passed on the full RBA rate cut to all customers. None of the 12 largest home loan lenders have done this. This is money that should be in the pockets of Aussie families.”

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Rowan Crosby

Rowan Crosby is a senior journalist at Elite Agent specialising in finance and real estate.