Only a fortnight ago, the futures market was forecasting that the Reserve Bank of Australia (RBA) would lift the Official Cash Rate (OCR) to 3.8% by December and to 4.4% by May 2023:
Futures market drinking the interest rate Kool Aid.
The futures market is slowly floating back towards reality, now tipping an OCR of 3.1% by December and 3.7% by May 2023:
Slowly descending back to reality.
The market’s OCR forecast is still far too bullish in my view, since it would equate to a discount variable mortgage rate of around 7% by mid-2023, assuming increases in the OCR are passed onto mortgage holders. This would represent a literal doubling of mortgage rates from their end-April 2022 level:
Australian discount variable mortgage rates to double in only 12 months!
The futures market’s OCR forecast would lift Australia’s discount variable mortgage rate to levels last seen in April 2011, when Australian housing values as a share of household income were significantly lower than they are currently:
Australian housing has never been this expensive.
Such a sharp and fast increase in mortgage rates would place many households into severe financial stress, would crimp household spending, would crash the housing market, and would push the Australian economy into recession.
For these reasons, the market’s OCR forecasts remain highly unrealistic and will once again be proven wrong.
