RBA forced to act in Brexit aftermath?

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The Reserve Bank of Australia may be pressured to cut the cash rate amid global turmoil unleashed from the Brexit vote.

The central bank’s board is expected to reinstate its ‘easing bias’ when it meets next week, the Australian Financial Review (AFR) has reported. The next cash rate cut is expected to come in August, as many believe it is too soon to pull the rate trigger next Tuesday with policy makers continuing to assess the Brexit fallout.

July's meeting will be nine weeks after it lowered the cash rate to a record low 1.75% in May.

The aftermath of the Brexit vote continued to upheave financial markets on Tuesday, the AFRreported, with the benchmark S&P/ASX 200 index down 0.7% following falls across European and US bourses on Monday night, and major plunges on Friday. 

Su-Lin Ong, a senior economist in Sydney at Royal Bank of Canada, told the AFR that she expects the RBA to cut the cash rate to 1.25% by mid-2017. 

“Any glimmers of the end of this global easing cycle have quickly been extinguished with Brexit,” she said. 

“Central banks are set to continue to provide more rather than less accommodation and the RBA remains part of this global narrative.”

Ong previously expected the cash rate to bottom out at 1.5%.

However, the possibility of further interest rate cuts increases the risk that the Australian dollar will start to rise, which would weigh on economic growth. 

Even before the Brexit vote, according to the AFR, 21 of 22 economists surveyed by Bloomberg on June 17 forecast an August rate cut.

Pricing on a cut as soon as next week has climbed to 24%, from 12%, since the Brexit vote.
 

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