ANZ Bank have made some adjustments to their Australian economic forecasts.
They believe weaker growth and lower inflation in 2015 will provide the RBA with a reason and the scope to take the cash rate down 0.5% to 2.00% over the first half of the year.
They say the case for rate cuts has been building over the past two months with weaker than expected GDP numbers released in early December and ongoing softness in non-mining activity outside of residential construction.
The big fall in global energy prices means lower than previously expected inflation in 2015 provides the scope for lower interest rates.
The labour market remains soft despite some evidence of rising hiring intentions.
Ongoing job losses in some sectors and strong labour force growth are pushing the unemployment rate higher.
This is hurting consumer and ultimately business confidence.
Australian term rates have fallen substantially on the back of lower global bond yields and the pricing in of rate cuts into money markets. ANZ Bank expect these trends to continue.
ANZ also have the Australian 10-year government bond yield falling another 50bp to 2.10% by the end of 2015. This will take it below the equivalent US Treasury yield.
On the back of these economic and interest rate forecast changes, and in anticipation of the Fed raising rates from Q2 of this year, the bank have made downward revisions to their Australian dollar forecasts.
ANZ expect the Australian dollar to fall further against the US dollar, targeting USD0.74 for end 2015.
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