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  • Writer's pictureCrest Economics

Emergency Interest Rate Cut- March 2020

We’re in the deep depths of the COVID-19 Crisis now. With the number of recorded cases reaching into the hundreds of thousands of thousands and 565 confirmed cases in Australia at the time of writing, its safe to say that the global and domestic economies are struggling. With Level 4 Travel Restrictions – essentially a complete international travel ban – implemented, our education and tourism industries have taken a huge hit. On top of that, depressed consumption from social distancing directives and widespread fear, as well as logistical and supply chain issues have caused the overall economy to suffer as well. There is a very real risk of a domestic, and global recession. Firms have struggled with cashflow, trying to stay afloat when consumers are losing their own income and taking precautions to save as much money as possible.

Hence, governments around the world are replicating the strategies that proved successful during the GFC – drastic expansionary fiscal policy. The Australian government itself has already passed a bill for a $17B stimulus package. For comparison, the first tranche of stimulus payments by the Rudd Government in 2008 only amounted to $10B. This bill is aimed at bolstering the incomes of welfare recipients with a lump sum of $750, as well as various measures to help small businesses maintain cashflow, and targeted support towards heavily affected industries.

Before the GFC, Australia had a sizeable surplus that we could tap in to. The Coalition government in the 7 years since 2013, have not been able to turn a surplus, instead implementing various tax cuts for businesses and households. This limits Australia’s arsenal for dealing with the oncoming crisis with large fiscal spending.

On top of that, the RBA has followed the US Fed’s lead by cutting the Cash Rate to a record low 0.25% in an emergency meeting today. This isn't the first time the RBA has made a rate cut outside of its regular meeting - it did one in July 1997, for example - but it is the first time two changes have been made in one month. Not even at the height of the GFC did the Reserve Bank resort to such measures.

The only tool available to Phillip Lowe is now to try and reach beyond the lower zero bound, as well as unconventional policy such as quantitative easing. Like our fiscal policy, the RBA’s arsenal was severely depleted over the last few years with historically low rates.

Both fiscal policy and monetary policy are more constrained than they were during the GFC, on a crisis that looks to be a real shock that will last for at least the next three months. Additionally, both the government, and the RBA will find it almost impossible to fix the supply chain issues that are the fundamental causes of the crisis in the first place.

Our economic outlook is looking very uncertain. We’ll only know how well Australia handled the crisis, and the damage that it caused to the economy once we come out the other side.

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