MELBOURNE (Reuters Breakingviews) - Central banks have started dispensing sugar pills to treat the coronavirus. Australia’s just became the first in the developed world to slash interest rates since the outbreak that hit hard in China went global. Others are expected to follow in somewhat synchronised fashion. Most of the impact will be marginal or misplaced. It’s up to governments to administer potent fiscal medicine.
The Reserve Bank of Australia on Tuesday reduced its so-called cash rate by 25 basis points to a record-low 0.5%. It was the fourth such cut in less than a year, to help prevent the $1.3 trillion economy from ending a nearly 30-year growth streak. After devastating bush fires, the virus threat has brought fresh fear to a country that counts on demand from the People’s Republic for everything from iron ore to tourism to education.
The U.S. Federal Reserve, European Central Bank and Bank of Japan also have recently signalled in unscheduled statements that they stand ready to help as needed with the outbreak. In Australia, though, the currency is already at its weakest against the U.S. dollar in over a decade, house prices have bounced back and stocks are richly valued.
Money today is plentiful and cheap to borrow. The RBA itself hosted a conference in 2017 during which Bank for International Settlements economists noted the limitations of monetary policy when rates are already low. That makes additional cuts feel more like a placebo – except it’s not even clear they’ll have the intended psychological effect. Monday’s rally in U.S. stocks was perhaps as much in anticipation of G7 finance ministers putting their heads together on Tuesday as central bank coordination.
Australian Prime Minister Scott Morrison has been slow to spend, clinging to the promise of a fiscal surplus. His and other governments, however, are better placed to usefully direct money in a health crisis. Rome, Beijing and Hong Kong have started to roll out policies to help struggling consumers and small businesses. RBA Governor Philip Lowe noted that Canberra would do its part, too. It’s a reminder that central bankers will be incapable of relieving the virus symptoms themselves.
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