There is a very bizarre disconnect between market expectations for interest rates over the next year or two, and the forecasts of economists. What is perhaps even more thought-provoking is that the market usually gets this stuff right. As you can see from the 30 day interbank futures prices here, the market is pricing in a 4.38 per cent cash rate by the end of this year (simply 100 less the bid of 95.62), which is less than the 4.5 per cent cash rate today.
Yet we have nontrivial inflation pressures with the risk of an ugly CPI print at the end of this month, falling unemployment, and, to date, above-trend growth prospects.
No so long ago the market was pricing in a 5.5 to 6.0 per cent cash rate by the end of 2011. Most economists expect rates to peak at around 5.5 per cent, or 100 basis points above current levels.
So there has been a huge shift in market expectations. My own view is that local interest rate futures are getting swamped by global sentiment and have divorced materially from any fundamentals-based expectations.
It will be fascinating to see what the RBA says at 2.30 today. The key thing to look for is any change to their growth projections. I cannot say much more as I am otherwise occupied on a trip in the US.
