This analyst says low global inflation will drive the RBA cash rate to a record low of 1%

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The RBA meets tomorrow morning to decide whether or not to cut rates again from the current level of 1.75%. The market is leaning toward a cut, especially now the Aussie dollar is up near 76 cents this morning.

But the bank won’t stop there, according to according to Capital Economics.

In its latest Australia and New Zealand Weekly the firm says that “a new era of stubbornly low underlying inflation will prompt policymakers to cut interest rates in Australia from 1.75% now to 1.00% next year”. It is also forecasting the RBNZ will cut rates to 1.5% from the current 2.25%.

Data released by the ABS last week showed that the terms of trade rose for the first time in 2 years. But while export prices rose, the data also showed import prices fell 1% during the June quarter, taking the 12-month fall to 2.8%.

That’s the point Capital Economics calls out in their outlook:

… hardly any inflation is being imported from overseas and there is very little price pressure in each economy‚Äôs domestic labour market. Underlying inflation in Australia may stay below the 2-3% target range for three years and in New Zealand it could stay close to the bottom of the 1-3% target range for almost as long.

As a result, the firm says both the Australian and new Zealand dollars will come under selling pressure.

“If we are right in thinking that interest rates in both Australia and New Zealand will fall by more than the markets expect while they rise faster than expected in the US, then both the Australian and New Zealand dollars could weaken from above US$0.70 now to around US$0.65,” Capital Economics said.

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