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RBA cuts cash rate to record low as coronavirus fallout continues

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The RBA has slashed 25 basis points from the official cash rate in an attempt to stem economic damage from coronavirus. It now sits at an all-time low of 0.5%.

"The coronavirus has clouded the near-term outlook for the global economy and means that global growth in the first half of 2020 will be lower than earlier expected," says RBA governor Philip Lowe.

Lowe singled out the outbreak's impact on the education and travel sectors, which will likely contribute to weaker than expected GDP growth in the March quarter.

rba reserve bank interest rates cash rate

On a more positive note, the RBA expects the economy to return to an improving trend once the virus is contained.

On the housing front, Lowe pointed to rising prices in most markets, "in some cases quite strongly".

The RBA's move comes as central banks and governments around the world signal an increased willingness to respond to the outbreak. In the first data drop reflecting the impact of the crisis, China's February manufacturing purchasing managers' index, a key indicator of business activity, plunged 14.3 points to a record low of 35.7.

CoreLogic head of research Tim Lawless says the RBA's decision was widely expected considering the downside impact of coronavirus on the Australian economy and household sentiment.

"The cut also comes as inflation remains well below the RBA target range, labour markets hold plenty of slack with an underemployment rate of 8.5%, and wages growth tracks at a near record low of 2.2%."

However, Lawless doubts whether the cut will be a significant boost to the country's housing market.

"Lower interest rates would normally be a catalyst for an acceleration in housing demand and value growth, however there is less certainty that this will add fuel to the housing market in the current economic climate.  This is partly because the latest rate cut is unlikely to be fully passed on to mortgage rates."

The RBA could even be shooting itself in the foot by signaling the seriousness of the crisis.

"A low cash rate coupled with concerns around the global spread of coronavirus, has the potential to spook consumers and drag confidence lower," he says.

Echoing this, Fidelity's Anthony Doyle says: "The economic benefit of today's interest rate cut on the real economy is questionable.

"Lower rates should support demand by encouraging businesses to invest and households to spend, but they do nothing to address supply-side disruptions."

Smaller lenders Athena, Homestar and 86 400 have committed to passing on the cut in full, with Westpac and CBA the first of the big banks to announce they will do the same.

"This is money that should be in the pockets of Aussie families," says Athena CEO Nathan Walsh.

"We challenge the industry to do as we have done and immediately pass on the rate cut so customers - new and existing - can experience the full rate cut benefits."

The action has been praised by comparison site Mozo.

"With so many negative pressures on economic activity, it's great to see Athena and Homestar acting quickly to pass on interest rate relief to their mortgage customers. We now need our biggest financial institutions to do the same," says Mozo director Kirsty Lamont.

"If the banks were to pass on today's official interest rate cut in full, average variable home loan rates will be at their lowest level in history and owner occupiers could be $56 a month better off," says Lamont.

According to research from Mozo, given the current average variable home loan rate of 3.67%, the monthly repayment for owner-occupiers paying principal and interest is $1834. If lenders pass on today's cut in full, the new average variable rate will be just 3.42% and monthly repayments would drop to $1778.

"Put your bank to the test," says Walsh.

"If they don't drop your rate in full, then drop your bank. The savings opportunity is too important to be short-changed."

We're cutting through the confusion to help you manage your money during the coronavirus outbreak. Click here for more on how COVID-19 could affect your job, budget, super and investments.

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David Thornton is a journalist at Money magazine. He previously worked at Your Money, covering market news as producer of Trading Day Live. Before that, he covered business and finance news at The Constant Investor. David holds a Masters of International Relations from the University of Melbourne.
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