RBA’s work not done yet

Australia’s house prices may rise by 8% this year but consumers are still reeling under high debt loads. With growth set to fall short of potential, we still expect unemployment to rise further which should weigh on wage growth and underlying inflation. As such, we still think that the RBA will cut interest rates to 0.25% by the middle of this year and launch quantitative easing. Further policy loosening should result in a renewed weakening of the Australian dollar and a fall in long-term Australian long-term government bond yields. By contrast, the resilience of New Zealand’s economy should prompt the RBNZ to keep interest rates unchanged.