Reserve Bank of Australia cuts official rate to 0.5%, cites coronavirus

The Reserve Bank of Australia said the coronavirus outbreak was having a significant effect on the economy. Photo / 123RF

The Reserve Bank of Australia (RBA) said it had cut its official interest rate by a quarter of a percentage point to 0.5 per cent, saying the coronavirus outbreak was having a significant effect on the economy.

Financial markets had fully priced in a quarter-point cut.

"The board took this decision to support the economy as it responds to the global coronavirus outbreak," the RBA said in a statement.

Separately, the Organisation for Economic Co-operation and Development (OCED) shaved 0.5 per cent off Australia's economic growth forecast for this year.

The OECD also lowered its central growth forecast from 2.9 per cent to 2.4 per cent, but said a longer lasting and more intensive coronavirus outbreak could slash growth to 1.5 per cent in 2020.

In New Zealand, some economists expect the Reserve Bank of NZ to cut its official rate, currently set at 1.0 per cent, at its next opportunity on March 25.

ASB Bank has joined with ANZ Bank and Westpac in predicting rate cuts in the coming months.

"The global impact of the Covid-19 outbreak now looks like it will be more enduring than thought not much more than a week ago," ASB economists said.

"The most effective support for New Zealanders and the New Zealand economy will come from central government responses, which can be most effectively targeted at the people and businesses most affected by the economic disruption," the bank said.

"Given the growing risk of more than a short shock, monetary policy also has a role in a co-ordinated government response," it said.

"The Reserve Bank of Australia's cash rate cut reinforces that central banks are now much more inclined to step in and provide support to economies," it said.

ASB now expects quarter point OCR cuts in both March and May, taking the OCR to 0.5 per cent.

Today's cut by the RBA follows three previous reductions in June, July and October last year.

Economists and analysts had expected central bank governor Philip Lowe to hold the rate until a recent spike in coronavirus cases wiped trillions of dollars off global share markets.

Last week, the S&P 500 on Wall Street experienced its worst week since the global financial crisis with more than $US6 trillion in value lost, while the ASX plunged further at the opening of trade on Monday.

"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," Lowe said in his statement.

"It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path."

The first deaths from the coronavirus were reported in both Australia and the US over the weekend, while Italy, Iran and South Korea revealed a spike in cases.

The escalation led to several countries expanding travel restrictions, further crippling economic activity and trading channels and compounding the fiscal pressure from the summer's devastating bushfires and ongoing drought.

"This was a sensible call," Deloitte Access Economics partner Chris Richardson told news.com.au.

"The Australian economy has been in the slow lane, and a summer of bushfires followed by coronavirus has weighed on confidence.

"It's important that the central bank weighs in to remind Australia that we have firepower as well as strong fundamentals."

- Additional reporting, news.com.au