Will rates rise?

The RBA meets tomorrow to decide whether the raise interest rates or not. Looking at the implied yield curve (this graph updates every day), I suspect the answer is not.

Update: As promised Chris Joye has a post on Aussie bond prices. I think he addresses the issues directed against him in the comments thread.

Having said that, the rolling natural and political catastrophes that we have had to contend with in the recent past have, admittedly, made market pricing look prescient.

The substance of his argument relate to loose US monetary policy and international diversification away from US risk. John Quiggin has a good post on the US risk. He makes the excellent point that any US default would be temporary and that certainly makes ratings agencies job a lot harder – but doesn’t really reduce (very) short-term risks. Chris’ argument is that the international situation combines with local factors makes the yield curve a poor forecast instrument. Information to update our expectations becomes available at 2.30 pm today. A rate rise will suggest Chris is correct, but a no-change decision doesn’t necessary mean he is right. (A decline in rates might mean the RBA thinks the economy faces recession risk – I doubt that outcome).

Update II: No change in rates.

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17 Responses to Will rates rise?

  1. chris joye

    there are a whole bunch of reasons why the implied yield curve is not a good guide to RBA monetary policy, one of which is that once you go past the neutral cash rate, the yield curve will almost never price in more than two further hikes. this despite the fact that the RBA’s inflation forecasts assume two further hikes explicitly, and have underlying inflation hitting 3.25% in 2013. another good reason is that the RBA itself has said market pricing is wrong. i will try and post on this sometime. yet another factor is central banks around the world buying Aussie govt bonds, which is distorting the yield curve. they are happy to buy these bonds somewhat irrespective of their price at present because of the yields. again, i will try and explain this later.

  2. JC

    I dunno Chris, the implied yield curve as about as good as it gets. That of course and the futures strip.

    What else is there?

  3. .

    What about the options market?

    I don’t really know – are they much different or is it like common stocks when you need to look at the stock price and the option price etc to get a real idea as to how the market is evaluating things?

  4. chris joye

    bloomberg or reuters survey of 25-30 economists forecasts for the next 2 years are a more pure guide to cash rate changes

  5. sdfc


    The RBA pretty much said market pricing for just two cash rate increases between now and mid-2013 was incorrect but it didn’t say anything about a hike being imminent.

    What I found strange was the sudden change sentiment toward a June rate hike.

    It has since abated. But when there is a sudden ramping up of rate hike rethoric by a couple of key market commentators history tells us something could be in the wind.

  6. Sleetmute

    The interesting thing is that market pricing on the probability of a hike has gone from 0% on 31 May to 16% today, despite the weak job ads and TD inflation gauge.
    Chris and most economists are predicting (at least)two rate rises by the end of Q1 2012, but the market clearly thinks differently. So far this year, the market has been right.

  7. PSC

    There’s very often/nearly always a discontinuity between the 5 and 6 or 6 and 7 month rate in this sort of analysis. (you see it between October and November 11 in this one – see how Nov is a bit out of line?).

    I refuse to believe Glenn Stevens has some agenda which always magically changes 6 months out.

  8. .

    Stevens is his own man. He doesn’t give a shit about elections etc. He’ll do what he sees as necessary.

    Except the implied inflation target has risen from 2.5% to 3.1%.

  9. chris joye

    sleetmute, the only reason the market seems to have been right is because we had the floods, the MENA oil crisis, and the Japanese earthquake-cum-tsunami-cum-nuclear crisis, which collectively have hit the Aussie and global economies for six. those who were predicting little to no action on rates before all of this look like a prescient genius. the truth is more complex.

  10. Sleetmute

    Well, Chris, even after the floods (when GS changed its view and pushed back its rate hike expectations to November), you published this post on 4 Feb saying that:

    All of the economists who shifted their first rate hike to end of the year are going to have to do a 180 degree turn, one way another. On the balance of probabilities, the RBA will be hiking before the end of Q2

    Why not just admit you’ve been wrong on this occasion and the markets have been right? The markets might not get it right all the time, it’s a big call to suggest, as you do, that they are systematically biased.

  11. chris joye

    No, this was before the Middle East crisis, and before the earth quake-cum-tsunami-cum-nuclear crisis with our second largest trading partner, Japan.

  12. JC


    All things being equal, but say even if those things hadn’t happened rates here aren’t going up in this economic climate.

    If they do the board would likely have joined Al Queada.

  13. Sleetmute

    Very dovish statement from the RBA.

  14. JC

    of course it’s dovish Sleet. The economy is literally falling off a cliff.

    Whereas there was next to zero chance I reckon the possibility the next rate move is down has gone to 10%.

  15. Sleetmute

    JC, will be interesting to see how the interbank market closes tonight.

    Chris, based on your latest blog post, you appear to think that the only reason the RBA did not move was a sudden dovish bias brought about by a few Board members, even though the Board composition has barely changed since 2007. That sounds like sour grapes to me. On that reasoning, you’d wonder how rates would ever go up at all.

  16. Sleetmute

    JC, markets still pricing in an 11% chance of a rate rise in July, a 50% chance by December and close to a 100% chance by September 2012. If you think there’s a chance the next move could be down, there is money to be made.

  17. JC


    I think there’s now (as I said) a 10% chance the next rate move is down. So it’s an interesting idea. I think the currency is too high although i haven’t traded the aussie from the short side for a little while.

    If the futures strip is suggesting 100% by 2012 they are a little overconfident i reckon.

    If the PMI is down we’re in serious trouble.

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