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Economy

Australia's central bank cuts rates to shake off virus fears

Fourth reduction in less than a year brings cash rate to record low of 0.5%

The Reserve Bank of Australia steps in to soften the epidemic's "significant" blow to the economy.   © Reuters

SYDNEY (Reuters) -- Australia's central bank cut interest rates to record lows on Tuesday in what is expected to be the first in a spate of policy stimulus around the world to fight the economic fallout from the coronavirus.

This was the fourth reduction by the Reserve Bank of Australia (RBA) in less than a year, bringing the cash rate to 0.5% amid mounting evidence momentum in the A$2 trillion ($1.30 trillion) economy likely stalled in the first quarter of 2020.

Financial futures are predicting the next move to 0.25% before June at which point policymakers are also expected to launch quantitative easing for the first time in Australia.

In a short post-meeting statement Governor Philip Lowe said the coronavirus epidemic was having a "significant" hit on Australia's economy and that it was difficult to predict how large and long-lasting the effects will be.

The Board "will continue to monitor developments closely and assess the implications of the coronavirus for the economy. The Board is prepared to ease monetary policy further to support the Australian economy," Lowe added.

The outbreak is plunging the world economy into its worst downturn since the global financial crisis more than 10 years ago, the Organisation for Economic Cooperation and Development warned on Monday, urging governments and central banks to fight back to avoid an even steeper slump.

Finance Ministers of the Group of 7 advanced economies and their central bank governors will hold a conference call later in the day to discuss measures to deal with the virus and its mounting economic toll.

Markets are also pricing in a 50 basis point cut from the U.S. Federal Reserve this month.

In Australia, the tourism, transport, hospitality and retail sectors have been jolted by a travel ban on China since the start of February.

Worryingly, a weekly survey showed on Tuesday Australian consumer confidence skidded to 5-1/2 year lows last week as fears of a pandemic sparked a huge sell-off in stock markets and badly shook the economic outlook.

In response to the market carnage, Australian policymakers held an emergency call on Monday, looking to dodge the risk of a recession.

The RBA did not provide details of the call, only saying that the government has indicated it would assist areas of the economy most affected by the virus.

Earlier, Prime Minister Scott Morrison said his government was working closely with the RBA on a response to the coronavirus outbreak, adding both were "highly aligned" in their understanding of the challenges before them.

A raft of data this week prompted economists to downgrade their expectations for fourth-quarter gross domestic product after growth in exports and government spending disappointed.

Data on Wednesday is expected to show Australia's economy expanded by a pedestrian 0.3% in the December quarter, taking annual growth to a sub-trend 1.9%.

In a troubling sign, Lowe said GDP growth in the current quarter was likely to be "noticeably weaker" than earlier expected.

AMP economist Shane Oliver said there was a risk of a contraction in the fourth quarter.

"In fact, if December quarter growth turns out to be negative a recession may have already begun," he said.

"Given the rising risk of recession, further policy stimulus is clearly required."

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