ANZ: Markets always wrong on Australian interest rates

The latest Australian interest rate forecast from the futures market tips the Reserve Bank of Australia to lift the official cash rate (OCR) to 2.7% by the end of this year, peaking at 3.4% by mid-2023:

Financial market interest rate expectations

If the market’s projection proved correct, this would be the equivalent of another nine 0.25% interest rate hikes over the next seven months, with a further three 0.25% hikes arriving in 2023.

Regular readers know that I view the market’s interest rates forecast as delusional given it would increase average principal and interest mortgage repayments by around 50%, in turn crashing the housing market and driving the Australian economy into a recession.

For these reasons, the Reserve Bank would be choked-off long before raising rates to anywhere near that level.

We’ve been down this road before. According to ANZ Bank, the futures market has historically been far too bullish on Australian interest rates, as illustrated clearly below:

Futures market's historical interest rate projections

For the better part of a decade, the futures market forecast interest rates to rise, only to see the actual OCR fall.

History is repeating, with futures market once again being far too bullish in its prediction on Australian interest rates.

Just be thankful the Reserve Bank, not the market, holds the interest rate level. Otherwise it would be Armageddon for Australian households and the economy.

Unconventional Economist


    • Agreed. For a decade, MB has argued that rising house prices lead to massive misallocation of resources while promoting income inequality and at the same time transfers wealth from the young to the old. Now you seem to be arguing that the RBA needs to reverse course before the game has really even begun.

      It may be the case that rising interest rates drive a correction in housing, that FHBs get hit, but the banking system is sound and Australia doesn’t face an imminent collapse in consumption. If inflationary pressures remain pronounced then I don’t see the Bank having much choice but to hike rates, even if house prices fall (which isn’t a bad thing).

      As for ANZ slagging market pricing, I’d love to see that chart done for their own forecasts. I’m guessing it’s equally horrendous.

        • The Bank isn’t on a pre-set course and at 0.35% monetary policy is hardly restrictive….

          And I dont see why government policy should be constantly skewed to guaranteeing double digit returns to property squatters.

        • “So you want a deep recession and misery?”

          Short answer: Yes
          Long answer: There are always losers and winners. Large portion of population have had deep recession and misery since RBA started cutting rates a decade ago. And I’m not talking about the economic aspect of low IR only.

        • They’re happy for a recession because they feel secure in their employment etc so believe they’ll actually profit from a recession (falling house prices), their position is one of self interest, which is what boomers get accused of.

          No one who owns a home will argue for price falls and once this lot are in that position that will be their stance (in most cases, not all). Falling prices will be the death knell for any gov, or opposition seeking election (see 2019).

      • I think he’s been saying “Don’t hike now!” LOL
        And they’ve been advocating for eons for lower IRs and the application of MPs instead – another LOL

    • They’re arguing for balance

      Some might want to see wholesale bankruptcy , destitution misery and a recesssion and a wholesale transfer of housing to the very wealthy but there are some who do not

      • The Grey RiderMEMBER

        Given both the LNP and Labor are unwilling to actually undertake the necessary economic reform required, particularly for housing, how else does this mess unwind? People voted against reform in 2019….so pain and suffering it will have to be.

        • Yep.
          They want all Government carrot and no stick.
          Until a bigger stick out of the Government’s control comes along….

      • it’s called medicine, and is preferable to the Sri Lanka alternative. Better for a Ponzi scheme to collapse the economy than to collapse society. It will be cheaper for people to go bankrupt, loose the house, then buy a new one at 3X income than to pay off the existing one at 10+times income. We just need to legislate against a blackrock style buy up.

        • I would prefer that people that were stupid enough to buy at 10x income be forced to pay it off without everyone having to go through a depression – but not sure we get that option.

          • The Grey RiderMEMBER

            @drsmithy…a lot of people are also selfish/greedy…what’s the saying about self-interest and voting…

      • It’s time for an end of the misallocation and a restoration of balance. .gov has decided the winners and losers for far too long. You can’t have capitalism without failure. This abortion of an economy (and greed, trash culture) should be allowed to fail.

    • The consolation is that MB have not got many of their predictions right and therefore their tendency is to take the middle path these days.In the end Mr Market will prove right.

    • One trick ponyMEMBER

      Barracking vs forecasting is an important distinction that I think sometimes gets lost on here. Barracking is wishing for something to happen, forecasting is an attempt to anticipate what will actually happen. On the latter – I still agree with MB.

  1. Isn’t a comparison of 2010-2020 a little flawed given inflation pressures were completely benign in that period and generally CBS were trying all means to ‘goose’ inflation?
    Whereas now we seem to at least have the beginnings of inflation?

    What will happen if RBA tries not raise and other CBs are?
    Could the RBA say they’re going to trash the currency instead of raising?
    Would that flow into import prices and exacerbate the inflation problem?
    Doesn’t get much press, but a number of countries have essentially blown up their currency in the last 1 – 2 years.

    The consumer will be under some duress for a while I would say. Plenty of anecdotal reports about.
    Happened to notice those $6 steaks at the supermarket are now $8. Many prices rises starting to be seen in the weekly shop.

    • The Grey RiderMEMBER

      Fuel prices are now back over $2.00/litre…just in time for the punters to drive to the polling booths.

    • A lot of the current inflation is externally driven, so smashing the economy to try and cool it is not going to be all that useful.

      • And if you don’t raise rates the dollar gets smashed and petrol goes to $4 per litre. Then everything produced domestically suffers inflation as well.

    • Camden HavenMEMBER

      Can create and maintain wealth through printing and buying worthless mortgage bonds.

      • The world has switched from an era or currency deflation to currency protection due to global shortage driving price inflation. The losers get war and anarchy, the winners get a bubble crash.

  2. Know IdeaMEMBER

    With predictive powers that accurate, the futures market should consider a role with the RBA forecasting wage rises.

  3. happy valleyMEMBER

    “Just be thankful the Reserve Bank, not the market, holds the interest rate level. Otherwise it would be Armageddon for Australian households and the economy.”

    15 months to go on his contract and backbone Phil can slink out of the RBA and leave it to someone else to deal with his greatest ever housing price bubble caused by ZIRP and QE.

  4. There seems to be a view today that recessions should ne avoided at all costs. But this is a falacy and it tends to lead to policy prescriptions that result in larger misallocation of investment, larger balance sheet liabilities and increased financial fragility, which feeds on itself and leads to ever larger economic vulnerabilities. Most Economists, Keynes included, have historically viewed recessions as a double edge sword; the loss of output and social disruption is a clear negative, but Economists such as Hayek and Schumpeter have highlighted its intrinsic benefits, liquidating lower returning resources and freeing them up for better, ensuring investors appreciate credit risk etc… Economists like Minsky noted that stability leads naturally to instability and a deterioration in investment from hedged finance to ponzi finance, risking the broader system.

    Clearly, policymakers should move to ensure a depression doesn’t ensue – where resources get idled on a long term basis, but thats not anywhere near what Australia faces. The RBA is leaning into rising inflation, but there are offsets there including tighter fiscal policy, slowing global growth. The forward curve in OIS likely reflects liquidity risk and an inflation risk premium, and may not be realised, but that doesn’t mean that policymakers should not start the adjustment process.

    • Know IdeaMEMBER

      That all seems reasonable. The only counterpoint I would raise at this stage is a nagging suspicion that the official cash rate will not likely have to go up to the levels predicted by the futures market for a recession to eventuate in Australia. That is not an argument against having a recession.

      • Given the swing in fiscal and monetary policy and slowing global growth, I suspect a recession may be unavoidable down the track, and the forwards won’t be realised, but we don’t know for sure, so the RBA starts in the direction of normalisation and it probably gets aborted.

        Talking to traders, liquidity in Aussie OIS is horrendous and some people who received rates got stopped out, and had real trouble liquidating their positions, so there’s a lot of liquidity risk premia in the curve.

      • it’s a given that 1% will crash the housing complex and thus the economy. However we are facing a stagflation scenario where rates will continue to rise as the economy crashes in order to protect the dollar and prevent more inflation from being imported. Just think of how much cost increased petrol prices add to everything. Oil prices are set by the world and our economy is beholden to it.

        • Correct. Everyone is going off the assumption that inflation will fall as the recession begins..

    • Ronin8317MEMBER

      Australians are over-leveraged, and a recession will happen before interest rate goes up 3%. There are roughly 2 trillion dollars in residential mortgage borrowing, so each 1% is a 20 billion dollar decrease in discretionary spending.

  5. Wasn’t that long ago it was almost unimaginable that the Fed would fail to support stocks, let alone actively try to drive them down.. writing a call on the SP as Zoltan puts it. I have never seen a more determined Fed Chair than Powell in his vow to kill inflation, and of course he knows it will be a very hard landing, yet he is still prepared to do “what is right, not popular”. IF the world has indeed broken out of a 40 year deflationary cycle (on a longer term basis) and inflation stubbornly refuses to be bought to heel then maybe the RBA will have no choice other than to effectively write a call on housing, our equivalent to the US stock market. It’s possible that pain is what will be needed to get inflation back close to acceptable levels. Of course it may only take a 15% decline in housing to break its back but what if CPI stubbornly stays over say 4-5%. RBA will have no choice but to keep its foot on the brakes, knocking the shit out of those who have drawn down obscene amounts against their mortgages to buy expensive cars and new boats or more unfortunately those who have borrowed irresponsibly to buy ludicrously overpriced housing. It’s not that difficult to see in 6 months Lowe grimly stating he will do what it takes to get inflation down, exactly as we have seen Powell do. It’s a new world at the moment, if inflation does not follow your central thesis then this reality is coming our way, regardless of housing prices. Interesting times.

  6. Mining BoganMEMBER

    It’s just like the WuFlu innit.

    50 people a day have to die so that the rest can live life as they’re accustomed to.

    Can’t see the difference between that and a recession, although less people will die in a recession. They’ll just be a bit hungry.

    • If your vaccinated and still die of covid then your immune system is stuffed already and there’s a good chance you wouldn’t make it past the winter flu season. Long Covid is a far larger problem as it effects productive individuals.

      • Mining BoganMEMBER

        Yes, i agree. I know a few long covid sufferers. I’ve no immune system so I’m rather concerned about the covid in my house right now. Long covid scares me.

        But the people saying let the WuFlu rip and damn the repercussions seem to be the same ones who say we shouldn’t have recessions because repercussions.

        It’s not just this blog, it’s everywhere out there.

        • It will be interesting to see if those with immune system defects( like me, mb,a woman who went to live in the country,poppy) end up with long Covid.
          Whether specific defects protect people from the acute severe, and or the long form.
          Not that they know where to look I suspect.

          • Mining BoganMEMBER

            The ones I know who struggled on for some time were asthmatics. That’s why I’m concerned about Lovey. Her bronchial problems are greater than my immune system.

            But reading elsewhere it seems to be pretty random. Guess we’ll know in five years time when the studies come in.

    • Know IdeaMEMBER

      Hungry? Or just less likely to impulse buy cheap throwaway Chinese made rubbish?

  7. MB writes: “History is repeating, with futures market once again being far too bullish in its prediction on Australian interest rates.”
    I think you mean ‘too bearish’. Higher rates (lower prices) in the market is a bearish sign. Lower rates are bullish.

    • One trick ponyMEMBER

      I don’t believe the OCR will get to anything like the 3%+ implied by the expectation curve. Ironically, if I’m wrong and they do get that high – I think it will actually be good news economically because it will probably mean they have somehow managed to get there without anything too nasty happening.

  8. – Long term interest rates are ALWAYS higher than short term rates.
    – If you would have followed the development of this chart then you would have seen that long(er) term rates already have come down quite a bit. Future rates AFTER say november 2022 indeed go higger but at an increasingly slower rate. The last 3 months of the chart actually show that the future rates in those 3 months are actually flat. And that’s a MAJOR change compared to the same chart of say 1 month ago.