Dollars go from helping to hindering

The recent strength of both the Australian and New Zealand dollars means that interest rates will have to fall further than widely expected to solve the twin problems of too slow economic growth and too low underlying inflation. Our forecasts that GDP growth in Australia will slow from 2.5% last year to 2.3% this year and that growth in New Zealand will stay at 2.5% are more downbeat than those of most other analysts. The stronger currencies have also led us to revise down our growth forecasts for both countries for next year. It follows that we believe underlying inflation will stay uncomfortably low a while yet. This combination of slow growth and low inflation explains why we are maintaining our long-held view that interest rates in Australia will fall from 2.0% to 1.5% this year and that rates in New Zealand will be cut from 2.25% now to 1.75%.