Policymakers have more work to do

Policymakers and the markets are too complacent in thinking that the slowdowns in GDP growth in both Australia and New Zealand will be modest and short-lived. In contrast, we believe that growth in Australia will slow sharply from 2.7% last year to 2.0% both this year and next and that growth in New Zealand will ease from 3.3% last year to 2.3% this year and to 2.0% next year. The resulting extra downward pressure on underlying inflation will prompt both the RBA and RBNZ to cut interest rates by more than the markets expect, to 1.50% and 2.75% respectively. The result will be a further weakening in both the Australian and New Zealand dollars, perhaps eventually to US$0.65 and US$0.60 respectively.