Dovish central banks set to cut rates further

he subdued global outlook and weakness in domestic economic activity has caused us to revise down our forecasts for interest rates in Australia and New Zealand. In Australia, annual GDP growth slowed to just 1.8% in the first quarter of 2019 and the unemployment rate remained elevated at 5.2% in May. What’s more, the RBA has recently reassessed the degree of spare capacity in the labour market and now believes the unemployment rate needs to fall to 4.5% before wage growth begins to pick up in earnest. We therefore think the RBA will cut rates to 0.5%, raising the risk that unconventional monetary policy will be required in the next few years. Meanwhile in New Zealand, subdued growth in economic activity and employment has led the RBNZ to take a dovish tilt. We now expect the RBNZ to cut rates to 1.0% by the end of 2019.