Economists at NAB have changed their interest rate outlook and now expect the official cash rate to fall to 2.25 per cent this year.
They are tipping the Reserve Bank will shave a further 75 basis points off the current cash rate of 3 per cent in response to deteriorating domestic economic conditions.
NAB is predicting that higher unemployment later in the year could force the Reserve Bank to make more cuts than previously expected.
NAB's chief economist Alan Oster says his economic growth forecast has been downgraded from 2.5 to 2 per cent for this year, because conditions are not improving.
"We're not saying the economy's going backwards, but it's hit a very soft patch, and if it sort of improves a bit from mid-year then you'll get something like 2 per cent growth," he predicted.
"Now, in that sort of environment, unemployment goes up to something like 5.5-5.75 per cent and, essentially, the Reserve will feel uncomfortable about doing nothing." Alan Oster is tipping three separate 25-basis-point rate cuts this year.
"You could well have one in February, if not I think by March anyway," he said.
"Then I think the Reserve would like to sit and watch for a while but we think, by the middle of the year, they'll see the need to do more, so we've tentatively put the rate cuts in March, May and August." However, the head of Asia-Pacific research at TD Securities, Annette Beacher, says NAB is focusing too heavily on its in-house surveys, rather than looking at the broader region.
"Their own business surveys have been particularly dire, and I think it's correct that the house view is based on their own proprietary information," she said.
"I've probably got closer eyes on China and Asia in general, rather than worrying about business sentiment.
So I think Asia is still set to be the driver of growth, and Australia is strongly leveraged to that.
NAB is expecting the lower rates and economic slowdown will see a modest decline in the Australian dollar, but only to around parity with the greenback by the end of the year.