Markets view RBA rate cuts as an inevitability

Exclusive to The Middle East Online

Edited by Nelly Tawil

Global markets are braced for further volatility this week, but the direct impact on Australia of Britain’s decision to exit the European Union should not go too far beyond the hit to investor sentiment for now say economists.

The yield on three-year Australian debt slumped to an unprecedented 1.5% as bets mounted the RBA would look to shield a local economy already struggling with a decline in capital spending and disinflationary pressures.

“The RBA has, in the past, often responded to global shocks with monetary easing at the next scheduled meeting,” said Adam Boyton, chief Australia economist at Deutsche Bank AG. “Whether that is the case this time around will depend on how markets respond over coming weeks and the nature of any likely flow-on to the real economy.”

Equity losses across numerous markets were trimmed in late trading, and sterling, which at one stage dropped more than 10% against the US dollar, ended the US session off around 7% despite initial panic.

The Australian dollar, too, recovered some ground after a 4.5 per cent fall, and is set to open Monday›s Asian trade at around US74.50¢, in line with trading before Brexit-related volatility.

It is buying about 54.7 pence, up 7 per cent since before Brexit became a reality on Friday.

Nomura Holdings Inc. reduced its forecast for Australian 2016 GDP growth to 2.7% from 2.9% following the vote for a British exit, or Brexit. Andrew Ticehurst, a Sydney-based interest-rate strategist for the bank, cited the impact of wider credit spreads, weaker equity markets and softer sentiment on the economy and said he expects the RBA to ease policy in August and November.

“Our call for two rate cuts by the RBA in the second half was beginning to look shaky after the stronger-than-expected GDP data and the lack of easing bias in the central bank’s language,” he said. “After Brexit, the call is increasingly looking good again.”