Dr Brendan Rynne, KPMG Chief Economist, responds to the March 2020 rate decision

Last month it was a 50-50 call on whether the RBA would reduce the cash rate. This month it was a lot clearer – rates were rightly cut by 0.25 percent today and there will probably be another 0.25 percent cut next month.

With central banks around the world poised to take action to stimulate already sluggish economies now facing the COVID-19 threat, the RBA was the first cab off the rank to do so.

It is hardly as if this was an about-turn, forced on an unwilling bank – the RBA’s trajectory at the start of 2020 has been facing firmly downwards.

But the addition of the coronavirus’ stultifying effects on the Chinese economy have quickly worked their way through to Australia both via the travel ban and a slowing down of demand for our commodities. The World Health Organisation’s raising of the threat level posed by the virus cast the die for a rate cut and forced Governor Lowe’s hand.

There are plenty of domestic reasons that would have justified a cut, even without COVID-19. Demand remains extremely soft, with consumer spending flat as households seek to increase their savings rather than spending the rise they enjoyed in their household disposable income (due to tax cuts as opposed to wages growth).

None of the inflation, unemployment and exchange rates are where the RBA would ideally like them.

But while I believe the RBA was obliged to cut rates today, we should be in no doubt that this is bringing Australia into uncharted and potentially dangerous waters. The cash rate is now within one more cut of entering into the 0.25 percent territory – the RBA’s self-assessed ‘lower bound’ – the rate nominated for potential adoption of quantitative easing.

On Wednesday, we have the National Accounts for Q4 2019, pre COVID-19, this already seems a long time ago. I predict these will show growth of 0.5 percent. That figure is modest, but will probably begin to look impressive by the time we see the Q1 figures.

The effect of the bushfires on many businesses and communities will have brought the Q4 figure down. It remains to be seen if the government takes stimulatory actions to combat lower consumption and reduced business activity and investment.

RBA media release

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