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.
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