TD SECURITIES: Australia and New Zealand are likely to cut rates in August

Photo by Ross Gilmore/Redferns

Britain has voted to leave the European Union, and risk assets are in turmoil, recording some of the steepest declines seen since the height of the global financial crisis some eight years ago.

Uncertainty reigns, and is unlikely to diminish anytime in the near-term, whether it be from a political, financial or economic standpoint.

Like clockwork, investors are now wondering what steps policymakers will take to help calm asset markets. It’s an understandable reaction, hard-wired into the psyche of markets which have learnt to expect additional policy stimulus, largely from central banks, whenever financial volatility hits.

Like others, Annette Beacher, TD Securities’ chief Asia-Pacific macro strategist, believes that the UK Brexit vote, and the subsequent uncertainty that it has delivered, will see central banks shift to an even more accommodative stance in an attempt to calm financial markets.

The Reserve Bank of Australia and Reserve Bank of New Zealand, despite previous reluctance, are likely to be forced to adopt a similar tact, she says.

Our base case already penciled in August cuts of 25bp for the RBA and the RBNZ to 1.5% and 2% respectively based on a ‘lower for longer’ inflation outlook. Prior to the Brexit vote, we and the markets had lost confidence in this view, scaling back the odds of these cuts to a close call 50/50 decision. This lack of enthusiasm was driven by not-dovish-enough tones from both central banks in recent weeks via speeches and policy statements.

Now with prolonged uncertainty attached to Brexit and our delayed US tightening schedule, as well as the AUD and NZD remaining rather resistant to risk-off trading sentiment so far, we see both central banks delivering August cuts with 85-90% certainty.

So, more-or-less, the RBA and RBNZ are near-certain to cut rates in August in her opinion, expressing a similar view to that of Westpac earlier this week in relation to the former.

Helping to underpin her view, Beacher believes that an additional rate hike from the US Federal Reserve will not occur until June next year “at the earliest”.

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