MNI POLICY: RBA Not Expecting Rapid Virus Recovery: Minutes

By Lachlan Colquhoun

     LONDON (MNI) - The Reserve Bank of Australia saw it "very unlikely" the

coronavirus outbreak could be contained quickly and the economy needed short

term monetary policy stimulus immediately, the minutes of the March 3 board

meeting show.

     Even in early March the Bank was expecting prolonged economic disruption

from the pandemic, believing that rates should be cut to protect jobs, keep the

exchange rate low and boost household and business cash flows.

     Although not noted in the minutes, the RBA is scheduled to make a major

announcement March 19, outside of its normal meeting and release cycle, which

may include another rate cut and details of a bond purchase program.

     The RBA cut rates by 25 bps at the meeting down to a record low 0.5% and

said it stood ready to ease further if needed. It has previously indicated that

it would enact unconventional monetary policy measures, such as the purchase of

Government bonds, when rates reach 0.25%.

     --NO RAPID RECOVERY

     The March minutes show that the Bank discussed, but rejected, the

likelihood that the pandemic would be contained "in the near future" to be

followed by a "rapid recovery".

     "In that scenario, the maximum effect of any additional monetary policy

stimulus would be felt in the recovery phase, rather than in the short term,

when policy support would most be needed," the minutes said.

     "However, this scenario was considered very unlikely, with the more

realistic scenario being that the outbreak would have a significant effect on

the Australian economy."

     Previous concerns that lower rates would fuel borrowing and boost a rampant

housing market were put aside and rated as a lower priority.

     --DOMESTIC HIT

     The RBA view is that the pandemic will have a major impact on Australia's

tourism and education exports, which comprise 5% of national GDP. These two

sectors are expected to decline by around 10% in the March quarter, lowering

overall GDP by around 0.5 percentage points in Q1.

     The Bank has already estimated the impact of the January bushfires as

lowering GDP by 0.2 percentage points for Q1.

     December quarter growth came in at a higher than expected 0.5%.

     The RBA, and now the Commonwealth Government, are resigned to a negative

quarter in Q1 but are battling to prevent negative growth in Q2. This would

deliver two consecutive negative quarters and send Australia into recession, its

first in more than 25 years.

     The Government has already announced a A$17 billion stimulus package and is

expected to announce a second package later this week, potentially on Thursday

on the same day as the RBA announcement.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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