Don’t believe “the market” on Aussie interest rates

The latest futures market forecast has the Reserve Bank of Australia (RBA) hiking the official cash rate (OCR) to 3.5% by the end of this year before hitting 4.1% by May 2023:

Official cash rate forecast

The futures market tips the biggest rise in interest rates in history.

If the market’s projection proved correct, this would lift Australia’s average discount variable mortgage rate to around 7.5% – more than double the pandemic low of 3.45%:

Discount mortgage rates

Discount variable mortgage rate set to more than double.

I have made it abundantly clear that I view the market’s interest rates forecast as ridiculous given it would lift average principal and interest mortgage repayments by nearly 50%. In turn, it would crash the Australian housing market and drive the economy into a deep recession.

The futures market making ridiculous interest rate forecasts is the norm, according to IFM Economist Alex Joiner:

Historical interest rate forecasts

The ‘market’ is an interest rate perma-bull.

For the better part of a decade, the futures market has been far too bullish on Australian interest rates.

History doesn’t repeat, but it sure does rhyme.

Unconventional Economist


  1. If inflation is somewhat persistent (which doesn’t mean prolonged….. what exactly is the time limit of transitionary anyway?) then the RBA may well keep on hiking into demand destruction. Certainly not out of the realm that we could hit that forecast especially if employment holds up in the short term (who says it won’t given current participation and underemployment rates). How long it stays there is of course another issue.

  2. So far the market has been more accurate than MacroBusiness sorry Leith.

    First MB was like – we’re going into deflation. Then it was – ok so there’s some inflation but its transitory. Then it was – ok so there’s inflation but it not the sort that RBA can do anything about. Now its – ok so rates are going up but not that high.

    May be right one day, but for now I’m listening to the markets.

      • 100% mate. Best call on this site, and moving my super into bonds riding that was perfect, not only saved my super from getting crushed, but saved a few others..
        Moved back to defensive 8 months ago, maybe too early, but looks solid now, just picking the bottom is the tricky part

      • Forward futures are not an entirely accurate predictor of interest rates. In one sense, they represent the cost of insurance against rises. Sellers are demanding – and getting – a useful premium above the likely trajectory.

        Now the RBA has and freely uses the QE lever alongside the interest rate lever, a recognisable downturn will be contested with action.

        Those elderly enough to have experienced the last recession 1990-91 will recall much of the damage came from the low liquidity that came after and persisted. With QE, this will only recur if the RBA consciously wishes it.

  3. Camden HavenMEMBER

    So what would happen if the RBA made the cash rate minus 10% tomorrow? Or made the cash rate 15%?

    I believe that the market is saying that this is the projected yield needed to cover collateral quality collapse that’s coming. Market got plenty of other bonds to buy.

    It’s the QE / QT that will hit bond spreads.

  4. elasticMEMBER

    Jerome Powell just appeared in front of the banking committee and stated that the Fed is likely to be following the market’s guidance for rates for the rest of the year. If the Fed keeps hiking the RBA may not have much of a choice if they want to protect the currency and imported inflation

  5. MathiasMEMBER

    I thought all the RBA did was look at Bonds… try and get them between a 2-3% bracket… and do sweet fckall for the rest of there day.

    Aussie Bonds –

    So that chart tells me Bonds are holding at 4% . That is insanely over the 2-3% mark. I suspect, RBA’s going to be hiking like a bat-out-of-hell ( very aggressively ) in the future, based off those figures.

    With inflation that high in Australia and rate aggressive rate hikes coming that badly, one can only presume Aussie Property and Stocks are cactus. -points and laughs- ” Ha ha… Baby Boomers just blew up there retirement savings… Serve’s you right for being so damn Greedy, you bstards “.

    The fact the AUDUSD isnt falling like a rock off the US/Australia carry trade is an absolute mystery to me. There must be some monkey in an office somewhere peddling an electric bike ‘ really really fast ‘ just to try and keep allthat up there. The AUDUSD, is on the edge of a cliff and there’s a long way down.

    I think in the short term, markets are a casino. In the long term, they pretty much just follow the trend… and that trend says to me, ” The AUDUSD is Fk’d “.

    I’ll remember to my dying day… Its just like MB says… ” Swings and Roundabouts “. I think Im starting to understand now ;p

    Maaate, they certainly are swinging. This makes Teletubbies look like an Education series.

    Now, please excuse me while I celebrate… Cha Cha Cha Cha Chaaaaa Cha Oiy Oiy … Cha Cha Cha Cha Chaaaaa Cha Oiy Oiy .

    The Boomers shouldnt of been so greedy ;p Now you all get whats coming you greedy bstards.

    My moneys safe. I got grub in my belly. I dont a pay a cent in rent. Do I look worried? Its a Baby Boomer tragedy… is what this is. They shoulda listened ;p Oh well. Its what you get.

    • I went through the GFC advising plenty of wealthy boomers, so let me tell you what comes next. Really rich ones? Meh, just another blip, 5 iron please. Rich ones – mmm, only one one Euro cruise this year luv. Doin’ alright ones – dividends are down 15% but asset values down means we now we get some age pension and the health card, as well as higher interest on the term deposits. Noice! Poor ones – farked. The only boomers that will get hit are the the ones that worked hard for the 3-bedder fibro that they still live in and are looking at the grocery and electricity bill and wondering if they’ll actually survive the winter.

      I’m Gen X so still paying off the mortgage and kid costs, but the boomers that you want revenge on? Not happening mate, I hate to tell you.

  6. Persistent inflation poses an existential threat to the exploitative system itself, and so interest rates must rise and then stay high for quite some time.

    Own a mortgage?

    Well. Stiff.

      • Goldstandard1MEMBER

        Just so I’m clear….

        Leith thinks markets are wrong vs. markets and NOW the RBA are bonkers…..

        How about this scenario:

        Markets thought RBA should have been raises a long time ago and stayed at emergency rates for far too long.

        RBA didn’t move and doubled down telling people to max borrow into assets during a pandemic at these record low rates that wouldn’t rise until AT LEAST 2024.

        Markets then predicted even higher rates are needed as RBA didn’t move when they should have

        RBA finally moved a little and markets think it should be more and MUCH faster.

        So basically RBA have caused this issue to turn into a mass extinction event due to ppl leveraging into assets when money was cheap and now that reality is setting in…..and NOW the RBA are Bonkers?

        No, they are idiots but even they now know where rates need to be and housing is the symptom not the disease so it gets hammered. Jobs go too by the way so some people on the sidelines’ will also struggle but it won’t matter as much as they don’t have debt to the eyeballs. This is the word of Inflation. Housing is NOTHING compared to having inflation around double digits which is absolutely coming here.

  7. Vivian DarkbloomMEMBER

    All this graph is telling me is that ‘the market’ has been expecting – not unreasonably – the RBA to meet its mandate, and that the RBA has failed repeatedly to do so.

    What is unfolding right now is the outcome of the RBA’s decade-long submission to political pressure, and it is either disingenuous or, quite frankly, naive of MB to discredit ‘the market’ as crazy for doing so. Reminds me of Xerxes whipping the ocean for not being more obedient…

    • Good point. UE, do you have any data that goes before the gfc on that graph??

      What if the market has been trying to say that all this money printing and lower rates is bad and should not have been that low.. and owing to lack if inflation, the central banks have been able to artificially keep them so low blowing asset bubbles all over the place. Thus deviating from the market futures expectations

      What if, market was correct in what should have happened and deviating from that has been a luxury that CBs have been able to afford in a deflationary environment at the expense of blowing these bubbles.

      What does the data before this crazy QE world look like? You know,in a period where inflation existed, as it does today.

      • It’s not sensible for our economy, but in a post QE world it merely reflects the repricing of risk. If QE starts up again risk will be suppressed again. Of course rates would never have been this low if asset values were included in inflation metrics.

        • RobotSenseiMEMBER

          They want the security of housing as an investment with a guaranteed return, but also want the upside of 30-40% gains in 18 months.

          Looks like they’re going to have to pick one going forward.

      • Vivian DarkbloomMEMBER

        The doubling (or whatever) is not the original sin here and MB’s insistence on blaming the fix for now being the root of all evil is akin to accusing the fire brigade of causing water damage when dousing the flames of a city on fire by a collective of arsonists.

        Interest rates should have never been so low for so long, while inflationary and asset bubble indicators were ringing alarm bells that were simply not heard in Australia because everyone was punch drunk on wealth effects. Someone has to pay the price for that, and the price is paid in deflating asset prices until the wealth effect is exhausted and core inflation returns to within the target range.

        Unfortunately, Australia at some point decided that productive or innovative work is inferior to using unfettered leverage with borrowed money for creating fake wealth. Well, it turns out the country will have to learn the hard lessen that the high rewards of the past come with high risks in the present – you just can’t have it all.

        I’m not arguing that the current RBA course is sensible – although it obviously is – but that it is, first and foremost, necessary, if only for the next generations to be able to rebuild Australia in a way that helps them live healthy, productive and meaningful lives. The alternative of a neo-feudal society is simply too depressing: a hedonistic land-owning class that trades properties with itself into stratospheric valuations and whiles away its time with vacuous leisure pursuits while a working class, imported en masse from developing countries (how lucky they are!), toils to barely make ends meet.

    • What is unfolding right now is the outcome of the RBA’s decade-long submission to political pressure,
      I don’t agree, what we are seeing is an economy that is being managed exactly as one would expect Captain Phil to manage the economy. Go back and read his PhD dissertation, or look at Phil’s actions through the eyes of his doctoral adviser (Paul Krugman). Phil Lowe is not simply an Econocrat
      “The Market” is for the most part making decisions based on changes in the measured data whereas Phil is acting more like a neo Keynesian economist plotting a course around the storm.
      What I think is more interesting are the market forces quickly gathering to depose Captain Phil. Having the RBA out of synch with the market is costing the market dearly, and that is simply unacceptable at the big end of town.

      • Vivian DarkbloomMEMBER

        I probably don’t have time to read Lowe’s dissertation but by public accounts he does seem to have pivoted on some core beliefs that were, according to the SMH (10-Dec-11), central to his appointment at the RBA:

        “After rising through the RBA’s ranks during the 1990s, Lowe completed a stint at the Bank for International Settlements – known as the ”central bankers’ bank” – between 2000 and 2002. And it is here that he made his mark. In a paper co-written with BIS economist Claudio Borio, Lowe argued that even when inflation was tame, central banks should be wary of allowing low interest rates to fuel asset-price booms. It was a controversial view. In the US, the prevailing wisdom and opinion of the then-chairman of the Federal Reserve, Alan Greenspan, was that price booms were not the main concern of central banks. But Greenspan’s low interest rate approach was discredited by the US housing collapse.”

        • The insane US house price doubling (especially on both coasts) in the aftermath of the Techwerck was largely driven by the Technical side of US banking betting it’s life (and that of the economy) on the Greenspan Put. (which turned out to be sensible bet.. for them) . Triple A rated Cds’s and Cdo’s were always a F’ing joke, nobody but nobody, that took a serious look into these financial instruments, believed they were worth a penny. So the big end of town made out like bandits, both coming and going, while the sheeple got fleeced.

    • Goldstandard1MEMBER

      +1 Viv. I just wrote a longer version of that above. Leith’s got this one backwards. You cannot save max debted silly people when inflation is raging, energy is spiking and food is doubling.

  8. Looks like the market have been within 1% or so, considering it’s not an exact science by any means, I’d say the trend is pretty good. 1% variance shouldn’t be end of the world in a healthy economy

      • Goldstandard1MEMBER

        You still don’t get it do you mate? The market was RIGHT, the RBA was simply too slow and low (which is great for my BBQ meats but terrible for the RBA). Now they have no choice to chase the market which makes the market RIGHT.

        I think you have it backwards.

  9. The red graph should go only to 6.5% at the end, not 7.5% as you have shown. The gap between the blue and red graph is not constant, but depends in a predictable (linear) way on the blue value. If you compare 2011 to 2023, the blue graph is lower by half a percent but the red graph is *higher* by half a percent, which is clearly wrong.

  10. BornwildMEMBER

    No way OCR gets to 3% by the end of the year (if ever again)

    Central banks aren’t going to have many consecutive months of 50bps+ hikes. As soon as the data shows that inflation has peaked, those hikes will quickly get back to 25bps or zero.

  11. elasticMEMBER

    SO can we expect the the RBA to pay the OCR equivalent on all the ESA balances the banks hold as a result of their QE because that’s going to cost them a lot of money. They are currently paying 0.75% in line with the OCR.
    An article the other day also pointed out that the RBA is bleeding losses from their bond holdings currently and may need to be topped up by treasury.
    Interesting times for the RBA

  12. I'll have anotherMEMBER

    Ignore the haters LVO. Lowering rates in a real estate driven economy doesn’t hurt most Australians. Doubling them does. You’re arguing a position that would see the least amount of human suffering, which ultimately is the point of an economist.

    Pretty sure many don’t care about the human factor.

    I don’t have an investment property and my mortgage is well within my means. I have no dog in the fight other than to see my countrymen not suffer.

    The monetary system is there to serve us, not the other way around.

    Edit: The silent tax by not meeting inflation targets never seems to get a winge out of most either, which is telling.

    • Hey you can save multiple people just by harvesting organs of one individual. Just a little unethical, just like the transfer of intergenerational wealth via increased house prices. The main problem in our society is the greedy rentier class who desire to get rich on other people’s efforts. The suffering is already locked in by the bubble prices, the sooner it fails the sooner we can restore shelter to being affordable for everyone. Anything less and your society is a failure.

      • Vivian DarkbloomMEMBER

        Spot on.

        Seems somewhat tone deaf to be concerned about the woes of the property-owning class while a whole generation has de facto been excluded from having one their basic needs secured. I guess, the usual tenet would be that they should have tried harder to have a go.

        Like it or not, but interest rate hikes are the guillotines of the 21st century.

      • GonzificusMEMBER

        Its other peoples children who are being consumed as long as we can keep our gainz, so no harm no foul for the current asset holders. /S
        The first thing that popped into my head after reading the preceding comments was Goya’s painting, Saturn Devouring His Son.

    • Goldstandard1MEMBER

      Hang on, hang on. I liked your sentiment of “looking after my countrymen/women”, but you have the cause and effect wrong like Leith.

      To look after you fellow mates, you needed rates higher years ago just like the markets were saying-not leverage up to the eyeballs. The RBA failed your mates, and forced them to get nude whilst the tide was in. It was a huge naked Rues beach party. The lifeguard even yelled out on the microphone “Hey guys, loving this nude beach party, it’s going until AT LEAST 2024 so grab those beers and another investment property and LET’S do this!” *Music turns up*

      and they did-they partied like it was 1999……..and now we have energy bills doubling, food doubling with inflation officially out of control with ABSOLUTELY NO DRY POWDER to use. So rates rise fast and hard. The Lifesaver packed up ages ago (Phil) and left, and the tide is going out with all these drunk flabby nude people complaining about what the lifesaver said and asking everyone where their clothes are. Well, they chose to take their clothes off and the water MUST flow out.

    • Just out of curiosity, exactly which of your countrymen is it that you want to see “not suffer”?
      Would you include countrymen involved in Manufacturing?
      How about those few brave souls that risk everything by working in the Aussie High tech sector?
      How about those unfortunates who simply can’t find the money to get onto the first step of the property ladder?

      In a perverted sort of way it’s our desire to not have the majority suffer that is amplifying the suffering of minority groups. Unfortunately some of these minority groups are essential for our collective long term survival.

  13. The best thing the RBA and ACCC have done in the last 5 years is the modernization of the payment systems with New Payments Platform (OSKO/PayID) and Least Cost Routing (Eftpos).

    Banks hate it which tells me its actually a good thing.

  14. One trick ponyMEMBER

    Market starting to go back the other way – 3 year gov bond rates have dropped about 40bps in a week (was 3.73 – now 3.3) – obviously a lot further to fall before they validate people like me who think the OCR will peak well below where the market has been expecting.

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