More radical action from RBA likely after Victoria's extends harsh lockdown

The Reserve Bank of Australia (RBA) may be forced to pump more stimulus into the financial system after Victoria extended its lockdown.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Reserve Bank of Australia (RBA) may be forced to pump more stimulus into the financial system after Victoria extended its lockdown.

Victorian Premier Dan Andrews outlined an aggressive plan to eliminate COVID-19 before residents can return to "COVID normal".

The plan to "eradicate" rather than "suppress" is condemned by many business leaders. It will come at a big cost to the state and national economies.

Negative reaction to Victoria's road to reopening

The chief executive of Wesfarmers Ltd (ASX: WES) is a vocal critic. His retail conglomerate employs 30,000 Victorians and he told the Australian Financial Review that the Andrews government didn't properly consult with retailers.

The federal government also couldn't hide their disappointment with the overly ambitious plan. Australia's September quarter GDP is almost guaranteed to cop another big blow after it crashed by a record 7% in the previous quarter.

More monetary stimulus for markets?

This is bad news for ASX share investors too, although the market will be looking to the RBA to provide a backstop.

After all, global equities are racing higher due to the liquidity dump by central banks around the world, and not by growth.

The probability of our central bank pulling harder on the quantitative easing (QE) and interest rate lever just went up!

Economists predicting bigger QE program

A Bloomberg survey of economists found that nearly two-thirds of respondents are predicting the RBA will increase QE by expanding bond purchasing.

UBS believes this will happen as soon as next month, while most others think it will happen towards the end of 2020 or early 2021.

Will the RBA cut rates to 0.1%?

The Reserve Bank could also cut record low interest rates further. This view isn't as popular among economists with three out of 11 believing the cash rate will fall to 0.1% from 0.25%.

These economists also think the RBA will align its three-year yield target to the cash rate to further lower borrowing costs.

While these voices are in the minority, the survey was probably completed before Premier Andrew's press conference yesterday.

Foolish takeaway

I won't be surprised if economists are now crunching the numbers to quantify the cost of the Victorian lockdown with the state contributing to around a quarter of the national economic output.

This may mean the RBA will be forced to become more dovish. Its governor Philip Lowe indicated his reluctance to lower the cash rate in the past and ruled out the use of negative interest rates.

Negative interest rates are probably still off the table, but the cut to interest rates is looking increasingly plausible in my view – even though it could be more symbolic than anything.

Should you invest $1,000 in Wesfarmers Limited right now?

Before you buy Wesfarmers Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Wesfarmers Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A woman's hand draws a stylised 'Top Ten' on a projected surface.
Share Gainers

Here are the top 10 ASX 200 shares today

ASX shares returned to positive territory this Tuesday.

Read more »

Multiple percentage signs in the palm of a man's hand.
Share Market News

ASX 200 lifts on the RBA's latest interest rate call

The ASX 200 is up 0.5% on the heels of the RBA’s interest rate announcement.

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
Broker Notes

Macquarie tips 40% upside for this ASX 200 real estate stock

Let's see what the broker is saying about this stock.

Read more »

Woman sits at her desk working at night, while traffic flows on a busy freeway out the window behind her.
Broker Notes

Transurban shares: Buy, hold, sell? Here's Macquarie's recommendation

Macquarie’s analysts just ran their slide rules over Transurban shares. Here’s what they found.

Read more »

A woman sits at her home computer with baby on her lap, and the winning ticket in her hand.
Consumer Staples & Discretionary Shares

Which 'enduring high-quality business' has become a forgotten ASX 200 stock?

Fundie says this ASX 200 consumer discretionary stock has been flying under investors' radar.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

Want a financial stock outside the big 4 banks? Macquarie tips 15% upside for this small cap financial

For those searching on the edges, this name could be worth a second look according to Macquarie.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why Kogan, Monash IVF, OFX, and ResMed shares are falling today

Why are these shares taking a tumble today? Let's find out.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Share Gainers

Why Breville, Clarity, EOS, and TechnologyOne shares are racing higher today

These shares are having a strong session on Tuesday. But why?

Read more »