The mad market slowly floats to the land of interest rates

A week ago, the futures market pushed the Reserve Bank of Australia (RBA) to raise the official exchange rate (OCR) to 3.45% by December and 3.75% by March 2023:

Futures Market Cash Rate Forecast: July 21, 2022

By the close of business on July 28, the futures market had lowered its OCR forecast to 3.1% in December and 3.35% in March, a downward revision of 40 basis points:

Futures Market Cash Rate Forecast: July 28, 2022

Futures Market Cash Rate Forecast: July 28, 2022

The market OCR forecast remains too bullish in my opinion. Because if that were to materialize, it would raise the average variable discount mortgage rate to 6.7% by March 2023, assuming OCR increases are passed on to mortgage holders. This would still represent a near doubling of mortgage rates compared to their level at the end of April 2022 of 3.45%:

Average Discount Variable Mortgage Rate

The average discount variable mortgage rate will double.

So in just 11 months, Australia’s average discount variable mortgage rate would drop from its lowest level on record to its highest level in a decade. In turn, average mortgage principal and interest payments would increase by 45%:

Schedule mortgage repayments

Mortgage repayments would increase by 45% according to futures market forecasts.

Given that Australian households are among the most indebted in the world, such a rise in mortgage rates would put thousands of households in serious financial difficulty, reduce household spending, drive down house and construction prices, and drag the economy into recession.

For these reasons, I always consider market OCR forecasts to be overly hawkish and unrealistic.

Surely the RBA won’t be so reckless? Only time will tell.

Unconventional economist
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