Post-Brexit: We Now Expect The RBA To Cut Rates In August - Barclays

We had expected RBA to stay on hold for the remainder of 2016, with real GDP growth likely to remain strong and labour market conditions improving, albeit at a more moderate pace.

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We had highlighted that this was a very close call, given underlying inflation is likely to undershoot the central bank’s inflation target for a considerable period of time. With the UK voting to leave the EU at the referendum, our revised global growth forecasts highlight a negative impact most notably in UK and Europe, but also look for global growth repercussions to be felt in many countries, including China and the US.  

In light of these developments, we have revised lower our Australia GDP forecasts by 10bp, to 3.1%, in H2 16 and 20bp, to 3.4%, in 2017. We have also lowered our inflation forecasts to 1.6% from 1.7%  in H2 16, and to 2.3% from 2.5% in 2017. We believe that the RBA will also be worried that increased financial market volatility raises uncertainty, as well as downside risks, to the economic outlook.

Therefore, we now think the RBA is likely to cut the cash rate by 25bp, to 1.50%, at its August meeting, while keeping the policy rate on hold afterwards for the foreseeable future.Meanwhile, we acknowledge that the RBA could cut the cash rate earlier than our forecast, although we think the central bank will prefer to thoroughly assess the consequence of the EU referendum before taking any action, while the sharp adjustment in AUD also will allow some relief to the economy.