Skittish markets slash Aussie interest rate forecasts

In mid June, the futures market forecast that the Reserve Bank of Australia (RBA) would hike 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.

According to The AFR, markets have now slashed their forecasts, and are tipping the OCR to only peak at 3%:

Curve Securities director Peter Sheahan said money markets had lowered the peak RBA cash rate pricing to 3 per cent, after the US Federal Reserve signalled it could “pause” interest rate rises following more monetary policy tightening in the coming months.

“The number of RBA hikes and terminal rate has been revised dramatically in just six weeks from 10 hikes, to six hikes and 3 per cent, after the US Federal Reserve’s aggressive action and ‘pause’ comment to give them time to assess,” Mr Sheahan said.

If the market’s latest OCR forecast comes to fruition, then Australia’s average discount variable mortgage rate would lift to 6.35%, up from 3.45% in April. In turn, average principal and interest mortgage repayments would still soar by 39% from their level before the RBA began hiking rates:

Australian mortgage repayments

The ‘market’ still forecasts big increases in mortgage repayments.

Given CPI moderated in the June quarter, from 2.1% to 1.8% (see next chart), the RBA would be wise to pause after tomorrow’s expected 0.5% rate rise to see how the data evolves.

Australian quarterly CPI

Australian CPI retraced in Q2.

In particular, the Q2 wage growth data will provide important insight into whether inflationary pressures are becoming domestically driven, rather than primarily imported or weather-related.

The RBA will also likely see that discretionary consumer spending is falling, alongside ongoing sharp falls in house prices.

To put it bluntly, the RBA needs to tread cautiously on rates. Because a 3% OCR by year’s end – as forecast by ANZ, Westpac and the market – risks driving the economy into an unnecessary recession. It would also be followed with aggressive rate cuts by the RBA anyway.

Unconventional Economist
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Comments

  1. Turkey tried slashing rates during a high inflation cycle to appease the housing body .Inflation went to 78.9% totally destroying the economy.
    This is why we lift interest rates to avoid an economic bust.Low interest rates are irresponsible. Unfortunately we have to pay for our greed.

    • Strange EconomicsMEMBER

      But … housing prices are more important than the economy!, so the Turkish approach would be picked.

      Govt policy, such as gas reservation could fix it, but takes political action.
      Instead luckily inflation will be stopped by lowering wages from immigration,
      a policy which is seen as winning by the business and housing lobbies.

  2. No one complained about historical LOW interest rates for a decade as housing went to the moon…

    • Correct. It was all well and good for it to launch into high risk territory and sacrifice a generation or two.
      Now’s the time to talk about reform, not restraint, so we don’t go back there next loosening cycle.

  3. With electricity and gas inflation yet to hit household budgets, CPI has further to run. Depends if the RBA looks through that or not IMO.