The RBA just cut interest rates to a record low of 0.5%, on the back of fears around the economic impact of a widespread coronavirus outbreak. This makes Australia the first country to cut major economy to cut rates in the advent of the coronavirus outbreak. Other central banks are expected to follow suit, with the US Fed saying that they would “act as appropriate” to support the economy.
Fears around COVID-19’s economic impact have intensified recently, with a Chinese PMI release recording the worst reading on record. Since large sections of China’s industrial heartland are under quarantine, whilst industrial activity has dramatically slowed. This disrupts global supply chains, with factories around the world struggling to source component parts for production. As such, the crisis puts a short-term brake on global growth. The rate cut was largely priced in by futures markets, which shifted from pricing an 18% chance of a cut to 100% within a couple of China’s manufacturing PMI being released.
As per usual, businesses with high debt like commonly held infrastructure and utilities stocks are likely to benefit the most from the cut. This is because they have the largest interest bills and can make more savings compared to other firms. Banks are likely to suffer as a result, given the increased competition in the mortgage market and pressure to deliver more cuts to lending rates. With deposit rates close to 0%, banks will almost certainly see their NIMs (net interest margins) being squeezed.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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