Nervousness about the state of the global economy is growing and overseas central banks are moving towards further easing, prompting markets to price in at least one more OCR cut by the Reserve Bank of New Zealand. There is certainly a strong risk of a cut, but we think the OCR is more likely to remain unchanged this year. The domestic economy is holding up well, and export conditions have remained quite favourable.

We now expect that the US Federal Reserve will cut interest rates twice this year. Political unpredictability has become a significant risk factor in the US, weighing on investment decisions and general confidence. We believe that it is now so embedded in US business behaviour that even resolutions of the current trade controversies are unlikely to convince businesses that the coast is clear. Lower interest rates are certainly not a cure for this, but they would help to underpin consumer spending and the housing market, which have remained robust to date.

We also expect the Reserve Bank of Australia to cut rates twice more this year, following the cut earlier this month. Australia's economic growth has slowed as falling house prices have weighed on consumer spending and construction, and inflation has been persistently below target. The RBA has decided that more stimulus is needed to drive unemployment lower and spark a lift in wage and price inflation.

Turning to New Zealand, the economy certainly lost some momentum in the second half of last year, and recent indicators have pointed to a subdued start to this year as well. But the near-term outlook has been no worse than what the RBNZ had already factored into its forecasts when it cut the OCR to 1.5% last month. Indeed, last week's data struck an even more positive note.


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