Low underlying inflation to prompt more rate cuts

We continue to believe that GDP growth in both Australia and New Zealand won’t accelerate at all this year from last year’s disappointing rates of around 2.3%. A further weakening in the outlook for underlying inflation will also play a major role in prompting the RBA and the RBNZ to cut interest rates by more than widely expected. The latest plunge in petrol prices will keep inflation in both economies below each central bank’s target range throughout this year. The weak economic backdrop will lead to underlying inflation falling below the target ranges too. Cuts in interest rates, from 2.0% to 1.5% in Australia and from 2.5% to 2.0% in New Zealand, will prompt the currencies of both countries to weaken to new seven-year lows.