RBA reduced rates to historic lows – UOB

Economist Lee Sue Ann at UOB Group assessed the recent decision by the RBA to lower the policy rate to a record low at 0.50%.

Key Quotes

“The Reserve Bank of Australia (RBA) decided to cut the official cash rate (OCR) by 25bps to 0.50% at the March meeting. This takes the policy rate to a new all-time low, after being lowered three times to 0.75% last year in a bid to kick-start an economy that was sluggish even before the summer's bushfires and more recently, the coronavirus threat came into play.”

“The RBA said it “took this decision to support the economy as it responds to the global coronavirus outbreak”. In the accompanying statement, which mentioned the “coronavirus” nine times, RBA Governor Philip Lowe added that the “outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors. The uncertainty that it is creating is also likely to affect domestic spending”.

“Australia’s unemployment rate rose to 5.3% in January, from 5.1% in December, whilst underemployment rose to 8.6%, the highest since January 2018. The RBA had previously said that monetary easing would continue if the unemployment rate trended up”.

“The RBA left open the door to further rate cuts, ending off saying “The Board is prepared to ease monetary policy further to support the Australian economy”. However, today’s move means the RBA now has only 25bps left in its ammunition bag before it reaches its effective lower-bound. We think the RBA may want to wait for more 1Q data, as well as to monitor how the COVID-19 outbreak evolves, before deciding whether or not to ease again in 2Q. Besides, Australia’s house prices reached record-highs in no fewer than five cities in February, a positive for household wealth and consumer confidence.”