Reserve Bank sees rapid coronavirus recovery as “very unlikely” and braces for “significant effect” on economy

The Reserve Bank believes the scenario of a rapid recovery from the coronavirus outbreak is “very unlikely” and that it’s realistic to consider the fallout will have a “significant effect” on Australia’s economy.

The prediction in the minutes from the RBA board’s meeting a fortnight ago comes as panic selling on global markets fuels fears that the world is heading into a deep recession even with emergency rate cuts by central banks.

Board members noted that since it’s previous meeting in February that “it had become increasingly clear that the spread of the novel coronavirus would cause major economic disruption around the world.”

“There was an increasing probability that people would seek to avoid gatherings, including public transport and perhaps workplaces.

“It was too early to predict how persistent these effects would be and at what point economic activity would rebound.”

Effectively looking into a crystal ball, the board acknowledged that COVID-19 had forced some central banks to consider interest rate cuts, accelerating the RBA’s decision to cut rates on March 3 to a new record low of 0.5 percent.

The Reserve Bank is likely to cut the cash rate again to 0.25 percent later this week when RBA governor Dr Philip Lowe issues an unscheduled policy statement that could include the move to buy bonds and assets through quantitative easing.

Since the March meeting, the US Federal Reserve has made two emergency interest rate cuts of 1.5 percentage points after heaving selling on Wall Street saw US shares tumble in volumes not seen since the 1987 sharemarket crash.

At the time of the March meeting, the Board believed international financial markets were “functioning effectively despite the sharp rise in volatility”.

The minutes note that despite a freeze in supply chains from China, its demand for coal had not reduced and iron ore imports had not been significantly affected.

The board believes Australian will benefit in late 2020 when Chinese growth rebounds in a race to make up for lost production.

But reflecting previous public statements, the Board acknowledged that COVD-19 was hurting Australia’s economy particularly in education, transport and tourism.

In addition to the coronavirus impact, the minutes note that bushfires over summer will have damaged growth in both the December and March quarters.

The board said that an extended period of low interest rates would be required and that it was prepared to cut the cash rate again to support Australia’s economy.

The RBA board’s next scheduled meeting is on April 7, but it is becoming likely that the monthly gathering will be pre-empted by an emergency rate cut this week.

Follow Peter Ryan on Twitter @peter_f_ryan