Very material contraction likely in Australia due to coronavirus

AUSTRALIA - SYDNEY. Australia's central bank was worried about the potential for a "very material contraction" in economic activity when it unveiled quantitative easing in an emergency meeting last month, minutes released on Wednesday showed.

The Reserve Bank of Australia (RBA) held an out-of-cycle meeting on March 18 when it reduced its cash rate to a record low 0.25% and embarked on a bond buying programme to shield the economy from the devastation caused by the coronavirus pandemic.

The minutes showed members agreed the cash rate was now at its effective lower bound and that policymakers had "no appetite" for negative interest rates, implying further cuts were not on the cards.

The RBA holds its next monthly rate review on April 7.

It noted the extraordinary measures "would not have been under consideration in normal times."

Members said in discussions that it was not possible to provide an updated set of economic forecasts, given the "fluidity of the situation" though it was "likely that Australia would experience a very material contraction", the minutes showed.

The number of coronavirus cases in Australia now exceeds 4,500 with 20 deaths. Authorities, worried about the spread of infection within the community, have rolled out increasingly restrictive measures to combat the virus.

Economists said the key for policy now was the extent of RBA's bond buying programme.

The central bank has so far been active in the market every business day since launching QE on March 20, lapping up about A$24 billion ($14.70 billion) worth of Australian sovereign and state government bonds.

SIGNIFICANT JOB LOSSES

Economists noted the sombre tone of the meeting but said the minutes failed to provide major insights into the RBA's thinking.

"While the RBA has not released an updated set of macro forecasts, the minutes hinted at substantial revisions amid much uncertainty," RBC economist Su-Lin Ong said.

"Coupled with a reluctance to take the cash rate into negative territory and the most recent large fiscal package, it suggests that the RBA is likely to sit on its hands for some time."

Australian Prime Minister Scott Morrison has pledged A$320 billion in fiscal support or more than 15% of annual economic output in a bid to keep the economy running.

The RBA warned the economic contraction in Australia could potentially linger beyond the June quarter.

"The size of the fall in economic activity would depend on the extent of the social distancing requirements, and potential lockdowns, put in place to contain the virus," minutes showed.

"There were likely to be significant job losses over the months ahead, although the extent of this would depend on the capacity of businesses to retain employees during this period."