RBA Lowe: Coronavirus risks to Australia greater than SARS

RBA’s governor, Philip Lowe, is appearing before the House of Representatives Economics Committee to discuss the outlook for the economy where markets are looking to the risks to the central view.

The key takeaway, so far,  is that the RBA would consider quantitative easing – purchasing of assets through balance sheet expansion – only when the cash rate eases to 0.25% and rates will only be considered for a rais when inflation rises to between 2-3%.

RBA Lowe is now commenting on the coronavirus. 

Key quotes

• We could see a bounce back.
• Chinese has announced stimulus measures.
• No idea if rate of infection will slow.
• Reasonable prospects of a quick bounce back if they do.
• Risks to the Aussie economy are bigger than they were during SARS.

Earlier comments on the outlook for the economy

• Says expected pick-up in growth supported by monetary policy, a new expansion phase in the resources sector, stronger consumer spending and a recovery in dwelling investment later this year.
• Says central forecast for economic growth to pick up to 2¾ per cent this year and 3 per cent over 2021.
• Says outlook is also supported by an expected modest lift in global growth.
• Says still some significant areas of uncertainty.
• Says the outbreak of the coronavirus represents a new source of uncertainty.
• Says the international spillovers of coronavirus could be larger than they were back in 2003 sars outbreak.
• We expect household consumption to pick up gradually.
• Says easing of monetary policy is also supporting a turnaround in housing investment, exchange rate, export demand. “so, it is working”.
• Expecting progress to be made towards the inflation target and full employment.
• Says but that progress is expected to be only gradual and there are uncertainties.
• Says given that, board has been discussing the case for a further easing of monetary policy in an effort to speed the pace of progress and to make it more assured.
• Says lower interest rates could also encourage more borrowing by households, increase risk of problems down the track
• If unemployment rises, no progress toward inflation target, balance would tip towards easing continuing to watch the labour market carefully.
• Negative interest rates in Australia are extraordinary unlikely, not a direction we need to go in.
  The threshold for undertaking QE has not been reached in Australia and I do not expect it to be reached.
• Says QE not on our agenda at the moment.
• QE would be considered only at a cash rate of 0.25%.
• We have no appetite to purchase private sector assets as part of any QE program.
• Focus would be on purchasing government securities to put downward pressure on longer-term interest rates.
• Negative interest rates extraordinarily unlikely.
• Further cuts to interest rates would come with risk
• Would need a marked change in outlook to see rates rise.
• Wants people to think about two-point-something per cent inflation in Australia.
• It is a concern that inflation has been below 2% for a while. 
• In the statement today that will be released today, the RBA’s forecasts inflation to move back to 2% next quarter.
• Will not raise rates before confident that inflation will be between 2-3%.
• Will keep rates low until we get there. 

FX implications

Having held in February, markets are now pricing a 15% chance of easing at the next RBA meeting on 3 March, and a terminal rate of 0.45% (RBA cash rate currently at 0.75%). AUD/USD is holding tight in the lower end of the 0.67 handle and was capped before the 0.68 handle.