World News

Australia central bank keeps rate steady, outlook intact despite bushfires, virus

By Swati Pandey

SYDNEY (Reuters) – Australia’s central bank held its cash rate at record lows at its first meeting of the year on Tuesday and sounded doggedly optimistic even as markets bet devastating bushfires at home and a viral epidemic in China would force aggressive easing.

The Reserve Bank of Australia (RBA), which slashed its key rate three times last year to 0.75% to help achieve its employment and inflation goals, kept forecasts for economic growth intact for this year and next at 2.75% and 3% respectively.

The outlook was supported by “the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction,” RBA Governor Philip Lowe said in a short post-meeting statement.

The upbeat statement sent the local dollar up by 40 pips to $0.6720 from $0.6680 before the rate review. <AUD=D3>

A majority of 32 analysts polled by Reuters last week had expected the Reserve Bank of Australia (RBA) to keep its benchmark rate at 0.75%.

Economists now expect a cut to 0.5% in April though financial futures are pricing in the possibility of the cash rate dropping as low as 0.25% later this year, with the economic outlook clouded by bushfires and the rapidly spreading coronavirus. <0#YIB:>

Lowe did acknowledge that the two events would “temporarily weigh on domestic growth” while reiterating that an extended period of low interest rates will be needed in Australia.

Analysts at National Australia Bank estimate travel bans introduced by the government could shave 0.15 percentage points off first-quarter gross domestic product growth, in addition to the temporary hit from the bushfires.

China is Australia’s largest trading partner while Chinese tourism and students account for about 0.9% of the nation’s A$2 trillion annual economic output.

Market attention will now shift to a speech by RBA Governor Philip Lowe on Wednesday where he is expected to outline the bank’s outlook for 2020. On Friday, the central bank will release its quarterly statement on monetary policy while the governor and his top associates will be grilled by lawmakers in parliament.

(Reporting by Swati Pandey; Editing by Sam Holmes)