HOW WILL THE CORONA VIRUS OUTBREAK IMPACT INTEREST RATES IN AUSTRALIA?
In the last few weeks, increased expectations of an Australian Recession had been seen, a major slowdown in everyday business activity, not to mention the trillions of dollars wiped off the global share markets.
There has been a lot of speculation over the impact of the Coronavirus on Australian Residential Property and the interest rates in Australia. Addressing the impact of the virus on the Australian economy, RBA deputy governor Guy Debelle recently made a statement that is reassuring regarding the current situation.
The Reserve Bank has anticipated that low interest rates, the revival of residential construction and infrastructure spending will come together to support the Australian economy.
“The effect of the virus will come to an end at some point,” Debelle said while addressing the Australian Financial Review Business Summit on Wednesday, 11th of March 2020.
RBA deputy governor, Guy Debelle recently spoke about the Australian government’s plan to offer jobs and support small scale businesses that would have an overall positive impact on the economy in the coming times. Furthermore, the government is still working on forecasting the impact of the disruptions in supply chains on the retail and construction industry.
The RBA has confidence in the Australian banking system, as it shows a promising liquidity position in the current times. The Australian banks have already managed to raise a notable sum of wholesale funding. Therefore, the Australian banks are prepared to face a period that may be marked by disruptions in the chains of demand and supply. Currently, the RBA hasn’t witnessed any pressure in the day to day operations of Australian banks.
Since June 2019, the cash rate has been reduced by 100 basis points, and at present, it is at a notable 0.25% low. RBA deputy governor, Guy Debelle also talks about financial markets and how there has been a marked increase in “risk aversion and uncertainty”.
This is something that is also likely to make it hard for markets to change and fix new prices for financial assets. According to Debelle, the Coronavirus outbreak is bound to have a significant impact on the Australian economy, but for now, one cannot anticipate exactly how big the impact will be. In the meantime, one can only estimate the direct impact of the virus outbreak on different industries for the March quarter.
Like Australia, there are many world nations that have experienced a reduction in policy interest rates. These interest rates are also expected to decrease further in many of these countries. Similarly, there has also been a historic decline in government bond yields. But, as compared to the US, Australian government bond yields have not noticed as much decline.
For now, the RBA does not see any signs of disruptions in the exports of goods such as iron ore and coal. As a result, the prices of iron ore and coal are intact and have not been impacted by the virus outbreak on a global scale.
The RBA is hopeful that the Australian government’s fiscal and monetary policy can come together to help overcome a struggling phase for the economy. Once the virus outbreak is contained, this will help Australia’s economy to thrive once again.
The RBA looks at the Coronavirus outbreak as an alarming factor that has the potential to disrupt the chains of demand and supply. This is why the RBA is looking for solutions in the monetary policy that can promise a more than usual high demand to meet the crisis.
Another way in which monetary policy can help tackle the impact of the virus outbreak on the economy is through its influence on the exchange rate. This strategy can moderate the impact of the virus outbreak on external demand which then can also be controlled and mitigated.
Apart from the monetary policy, a drive to lower the interest rates by RBA will also prove as a possible measure to deal with the impact of the virus outbreak on the Australian economy. There is no doubt about the fact that the low interest rates in Australia will offer a sigh of relief for businesses with debt, along with providing more disposable revenue to the domestic sector.
The Reserve Bank is of the opinion that the Coronavirus outbreak will surely weaken the economy on a global scale, especially in the first quarter of this year. The two sectors in the Australian economy that will be directly hit in the March quarter of 2020 will be tourism and education.
But, for now, one cannot clearly ascertain the impact of the virus outbreak beyond this quarter. After the March quarter has passed, one can expect a lot of significant changes not just in the Australian economy, but also in the economy on a global scale.