Economists predicting emergency rate cut this week

More than half of the 15 economists who participated in Finder’s last-minute RBA Cash Rate Survey said they expected the Reserve Bank of Australia (RBA) to take extreme measures to control the slumping economy, with an out-of-cycle emergency cut to the official cash rate predicted to take place later this week.

The market plummeted earlier this week to its lowest level since April 2016, as the coronavirus outbreak continues to cause damage to local and international economies.

The survey found that 53 per cent of the economists surveyed expected the RBA to make the emergency cash rate cut this week.

RBA governor Philip Lowe said in a statement earlier this week the central bank would announce “further policy measures to support the Australian economy” on Thursday (19 March), with some analysts suggesting the central bank may cut the cash rate to a new record low of 0.25 per cent.

The RBA recently slashed the official cash rate by 25 bps to an already record low of 0.5 per cent.

The central bank also provided the banking sector with a liquidity boost on the overnight money market, purchasing bank assets through repurchase agreements totalling $8.8 billion, well above the daily average.  

Finder insights manager Graham Cooke said the state of the economy as well as predictions and expectations were changing rapidly.

“Only a few days before the last RBA cut two weeks ago, 85 per cent of economists said they did not expect a cut and only half thought the ASX 200 would drop by 10 per cent in value,” Mr Cooke said.

“Within a week, we had a cut and a 20 per cent drop. This signals the sheer severity and speed of the coronavirus impact.”

Ten economists surveyed by Finder said on Monday they did not expect the RBA to announce the introduction of quantitative easing. However, later on Monday Westpac announced they expected both a rate cut and quantitative easing to happen this week.

Expect a short-term recession

Almost all economists surveyed, or 87 per cent, said a recession was now likely, a significant shift from the 89 per cent who did not expect a 2020 recession when surveyed in December.

However, two-thirds, or 67 per cent, said the recession would be over by the end of the year.

Mr Cooke said that while fear of recession had been simmering among the general public for a while, economists had until now held a more optimistic outlook.

“We’ve seen fear of recession among the Australian public grow over recent months, while the vast majority of economists were saying it wouldn’t happen,” Mr Cooke said.

“COVID-19 pouncing unexpectedly on an already weakened Australian economy has very much changed the game.”

House price drop

Most economists surveyed said they expected a drop in house prices, with 20 per cent expecting a significant drop, and 60 per cent expecting a slight drop.

Only two experts, or 13 per cent of respondents, expected house prices to remain unaffected.

Mr Cooke said a downturn in the housing market could present an opportunity for those prepared to purchase property.

“If you’re one of the first home buyers who missed out on the 2019 price dip, 2020 could provide a second bite at the apple,” he said.

“Keep a close eye on your local market but be careful – nobody knows what may be around the corner or how long this coronavirus dampening could really last.”

The ASX and the stimulus package

The survey also asked economists how long they thought the ASX could fall before a recovery, with the average economist pointing to a bottom of 4,460.

“If markets plunge to the depths predicted here, it will be a 37 per cent drop since the market peak of 20 February,” Mr Cooke said.

“This will be the most significant drop since the 53 per cent plunge post-GFC.”

Asked whether the government’s recent stimulus package would be sufficient, 54 per cent said it would not.

The federal government last week announced a $17.6 billion stimulus package designed to combat the downside impact of the coronavirus outbreak on the domestic economy.

The government said up to 6.5 million individuals and 3.5 million businesses would be directly supported by the measures.

[Related: Fed announces 100 bps cut, commences QE]