We believe that GDP growth in Australia will fall well below potential this year as the housing downturn bites. That means that unemployment will soon start to rise again and underlying inflation will remain well below the lower end of the Reserve Bank of Australia’s 2-3% target band. We therefore expect the RBA to lower interest rates by 75bp by the middle of next year. Combined with falling commodity prices and slumping stock markets, that should contribute to a further weakening of the Australian dollar.
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