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Pressure on RBA to cut rates after global central banks move on virus

SMH/ March 16, 2020

The Reserve Bank is under pressure to cut official interest rates and signal other moves to boost the country after central banks around the world announced financial crisis-like moves to protect the global economy.

As Prime Minister Scott Morrison said the coronavirus outbreak was now “well beyond the GFC”, some of the world’s most important central banks took coordinated action to secure the economy.

The US Federal Reserve is slashing its official interest rate by a full percentage point, taking it to a range of zero to 0.25 per cent. America now has official interest rates higher than Australia where the Reserve Bank is sitting at 0.5 per cent.

Only a week ago it cut rates by half a percentage point as the scope of the coronavirus outbreak became apparent.

The bank is also announcing it is re-starting quantitative easing measures. It will buy $US500 billion ($802b) worth of American government debt and increase its holdings of mortgage-backed securities by $US200 billion ($322b).

“The [bank] expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” it said in a statement.

The move came as the central banks of Canada, England, Japan, Europe and Switzerland announced a “co-ordinated action” to pump liquidity into the global financial system.

The banks agreed to effectively cut the price of American dollar swap arrangements among themselves by a quarter percentage point.

“The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad,” the Bank of England said in a statement.

Last week, the Reserve Bank had to pump $8.8 billion into the Australian financial sector because of liquidity issues in the local market.

Across the Tasman, the central bank of New Zealand on Monday morning cut its official interest rate by 0.75 percentage points to a fresh record low of 0.25 per cent.

Following an extraordinary meeting of its board, the NZ bank said it would make the deep cut and hold rates at that level for at least the next 12 months.

“The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus,” it said

“Since the outbreak of the virus, global trade, travel, and business and consumer spending have been curtailed significantly. Increasingly, governments internationally have imposed a variety of restraints on people movement within and across national borders in order to mitigate the virus transmission.”

It also revealed it may engage in its own form of quantitative easing “should further stimulus be required”.

NAB economists said it had expected the Reserve to cut official interest rates to a record low of 0.25 per cent at its April meeting.

“But fast-changing events mean the risk of an inter-meeting rate cut by the RBA to 0.25 per cent is likely to have increased sharply,” they said.

“This was not how the RBA behaved during the global financial crisis or even after the 9/11 terrorist attacks, preferring to move at scheduled board meetings.

“However, with the next board meeting still three weeks away on April 7 and the world and Australian economies continuing to rapidly deteriorate, there seems little point in waiting three weeks to deliver further support to the Australian economy on the interest rate front.”

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