Markets float back to reality on Australian interest rates

Only a fortnight ago, the futures market was forecasting that the Reserve Bank of Australia (RBA) would lift the Official Cash Rate (OCR) to 3.8% by December and to 4.4% by May 2023:

Futures Market 17 June Interest Rate Forecast

Futures market drinking the interest rate Kool Aid.

The futures market is slowly floating back towards reality, now tipping an OCR of 3.1% by December and 3.7% by May 2023:

Futures Market 24 June Interest Rate Forecast

Slowly descending back to reality.

The market’s OCR forecast is still far too bullish in my view, since it would equate to a discount variable mortgage rate of around 7% by mid-2023, assuming increases in the OCR are passed onto mortgage holders. This would represent a literal doubling of mortgage rates from their end-April 2022 level:

Forecast variable mortgage rates

Australian discount variable mortgage rates to double in only 12 months!

The futures market’s OCR forecast would lift Australia’s discount variable mortgage rate to levels last seen in April 2011, when Australian housing values as a share of household income were significantly lower than they are currently:

Australian housing assets to disposable income

Australian housing has never been this expensive.

Such a sharp and fast increase in mortgage rates would place many households into severe financial stress, would crimp household spending, would crash the housing market, and would push the Australian economy into recession.

For these reasons, the market’s OCR forecasts remain highly unrealistic and will once again be proven wrong.

Unconventional Economist

Comments

    • Jumping jack flash

      Thats certainly one option, but highly unlikely.
      They seem to have got a taste for raising interest rates, the banks certainly wont complain, who doesn’t like more money? So they will probably continue raising them while inflation is high – and inflation isn’t going away – until one or more banks implode, like 2007.

  1. Market is a collective intelligence and will always be right against individual brilliance

  2. Jumping jack flash

    The best option is to look through the inflation as transitory and then implement policy to pay everyone more.. like, I don’t know, raising the minimum wage…?

    Hmm.

    I really can’t help but think that the world was poised to implement “controlled” hyperinflation with trillions of dollars of stimulus in the name of covid, until they got a tap on the shoulder and a note with the words “pull it”, or something like that.

    What they’re doing now simply makes very little sense, the result is totally predictable, and they should know it. I mean, 2007 wasn’t all that long ago, was it?

    • Know IdeaMEMBER

      Mate! I am struggling to remember what happened yesterday and I drink way less than a central banker.