Matt Johnson at UBS does a nice job of summarising the interest rate probabilities implied by current market pricing, and argues they may be right, just now. I don't disagree violently. This is a mistake people often make when comparing market pricing to economists' expectations. Economists (and the RBA) think in terms of a most likely, or modal, 'central case'. Markets provide a more precise probability-weighted cash rate forecast, which is obviously different to the modal case. It is useful to distinguish between the two. Matt comments:
"Thinking probabilistically, however, the market seems about fair for the near term – if one allocates probabilities of cash rate moves as we have done in chart 31, to the right (-100bps = 2.5%; -75bps = 2.5%; -50bps = 15%, -25bps = 10%, steady = 50%, +25bps = 19% and +50bps =1%), the expected change in the cash rate is -9bps. Current market pricing is ~ -3bps. Should the European situation clarify, the probability of cuts would decline, and the expected value of the cash rate would rise."
