Australia looks to reduce risk of recession, RBA may cut cash rate

Australia’s financial regulators scheduled an emergency call on Monday to discuss the impact of the coronavirus outbreak, two sources familiar with the matter told Reuters, as the country looks to reduce the risk of recession.

The Australian dollar edged away from 11-year lows on Monday, as speculation mounted the world’s major central banks were planning a coordinated barrage of stimulus aimed at offsetting the economic impact of the coronavirus.

The conference call, involving the country’s prudential regulator, markets watchdog and central bank, comes as markets now expect the Reserve Bank of Australia (RBA) to cut its cash rate today (Tuesday) at its scheduled monthly review.

The Aussie had fallen sharply late Friday as investors piled into wagers the Reserve Bank of Australia (RBA) would cut rates at its monthly policy meeting on Tuesday.

The epidemic in China - Australia’s No.1 trading partner - is having an outsized impact Down Under with a travel ban hitting the tourism and education sectors and having spillover effects on overall spending.

There are now 33 confirmed cases in Australia after the country reported its first community transmission of the coronavirus on Monday.

Worryingly, the nation’s chief medical officer warned on Monday it was no longer possible to completely prevent people with the coronavirus from entering the country.

If the RBA eases policy, as expected, it will become the first central bank in the developed world to respond to the coronavirus, with the US Federal Reserve and the Bank of Japan also standing ready to act.

“In time of apparent crisis, the RBA will want to feel ahead not behind the curve,” Betashares chief economist David Bassanese said in a note.

“Indeed, Australia now faces its greatest risk of recession since the global financial crisis, with private demand already weak, and with much less fiscal and monetary firepower to respond.”

It is unclear if the regulators will release a joint statement after their crisis meeting.

Australian financial futures are now almost fully pricing in a quarter point cut to the cash rate to 0.5 per cent from an all-time low of 0.75 per cent. Last week, futures implied a one-in-five chance of such a move.

Australian Treasurer Josh Frydenberg reiterated on Monday his government’s fiscal response to the coronavirus will be “responsible, considered and targeted”.

Frydenberg said he expects the A$2 trillion ($1.3 trillion) economy to further extend its 29 years of recession-free growth, despite a run of sub-par economic data since the middle of 2018.

Economists reckon a stronger fiscal response is needed to support economic growth.

“Lower interest rates can help cash flows, lower the exchange rate and potentially boost confidence, but easier fiscal policy will also be required, particularly when both the household sector and business investment are already weak,” said NAB chief economist Alan Oster.

Data due Wednesday is expected to show the economy expanded at a below-trend pace of 2 per cent last quarter, although growth in the current quarter could turn negative.

Oster is one of a number of economists, including those from Westpac, UBS and Goldman Sachs, who on Monday changed their forecasts to predict a 25-basis-point cut at Tuesday’s meeting. The decision will be released at 0330 GMT.

Representatives for the RBA and the Australian Prudential Regulation Authority declined to comment. The Australian Securities and Investments Commission did not immediately respond to requests for comment.

The prospect of a global response offered some support given Australia’s reliance on tourism and resource exports to drive domestic growth.

Federal Reserve Chair Jerome Powell surprised many on Friday by issuing a statement that the bank was ready to support the US economy, and the Bank of Japan said much the same on Monday.

“This statement is likely to be seen as a “call to action” for other central banks around the world,” said Bill Evans, chief economist at Westpac.

“We now expect the RBA to cut the cash rate to 0.5 per cent at tomorrow’s meeting,” he added. “That is likely to be followed up by a second cut to 0.25 per cent at the April board meeting.”

A Reuters poll last week had found few analysts expected a move so soon, but the sheer scale of share market losses and dismal data out of China changed all that. [AU/INT}

Two surveys from China showed factory activity contracted at the fastest pace ever in February.

Agencies