There's been plenty of bearish forecasts for New Zealand's economy, but this easily beats them all

At Business Insider we’ve seen some pretty bearish forecasts on the outlook for New Zealand’s economy.

Analysts, including from the likes of Goldman Sachs and Morgan Stanley, have been busy slashing their forecasts for economic growth, interest rates and the level of the New Zealand dollar.

Well, following the RBNZ’s decision to cut interest rates earlier this morning, it appears that we’ve now found the most bearish of all the bearish forecasters – Capital Economics.

In a note released after the RBNZ’s rate decision was announced, here’s Capital’s forecast for interest rates in the second half of 2015, with our emphasis added.

“We had wondered whether the RBNZ would follow June’s 0.25% reduction in rates with a 0.50% cut in July. But instead the Bank chose the more cautious option of combining a 0.25% cut with a stronger signal that further reductions lie ahead. While the statement in June said that further rate cuts would depend on the data, this time the RBNZ just said “at this point, some further easing would be required”.

This implies the economy won’t even need to weaken further for the RBNZ to reduce rates below 3%, most probably at the next meeting in early September. But our view that the economy will weaken by more than the RBNZ expects and that inflation won’t rise as it hopes means the Bank will reduce rates by at least 0.25% at each of the remaining three meetings this year. We wouldn’t be surprised if a 0.50% cut at one of those meetings or another 0.25% reduction early next year took rates down to just 2.0%”.

Unsurprisingly, given their rates forecast, and expectations that economic growth could slow to just 2.0%, they expect the New Zealand dollar will cop a pasting in the months ahead.

“While our call that rates could eventually fall to 2% looks aggressive compared to the markets’ view that 2.75% or 2.50% may be the floor, it’s worth remembering that at the start of the year our previous forecast that rates would fall to 3.0% looked a bit zany. If we are right in believing that the RBNZ has yet to fully appreciate the extent of the slowdown that lies ahead, then interest rates of 2% and a New Zealand dollar worth around US$0.55 would not be too crazy”.

That’s .5500, having been nearly .7750 in late April. More akin to a shellacking rather than a pasting, if their forecast turns out to be be correct.

This morning the Kiwi buys .6631 US dollars. If it falls to 0.5500 as they suggest, it will represent a further decline of 17%.

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