Struggling to cope with commodity collapse

The plunge in the prices of the key commodity exports of both Australia and New Zealand late last year will soon filter through into weaker domestic activity, resulting in GDP growth this year slowing to just 1.8% in Australia and to 2.3% in New Zealand. This will contribute to underlying inflation in both economies falling below the targeted ranges. We believe this will prompt both the RBA and RBNZ to reduce interest rates by more than is widely expected. By the end of the year, we expect that the RBA will have cut interest rates to 1.5%, from 2.25%, and that the RBNZ will have started to reverse last year’s hikes, by reducing rates from 3.5% to 3.0%.