When will rates peak? It depends what week you ask the question
There are many ways that you can predict where interest rates will peak. You can pick a date and number based on your own view of the market, you can build a forecasting model or you can look at market expectations. Right now, market expectations are showing up to be pretty close for monthly announcements but the view as to when rates will peak is changing significantly depending what week you ask the question.
One way to measure market expectations is by looking at ASX 30 Day Interbank Cash Rate Futures. Investing in this allows users to hedge against inflation and better manage their exposure to cash. Trading of the futures allows us to see what investors think will happen to the cash rate. Recently, it has been pretty accurate although this month, it overstated the increase, predicting a 0.5 per cent increase (it was 0.25 per cent). As to when rates peak however continues to shift a lot more and changes depending on what week it is. This reflects how changeable economic data and sentiment are at the moment.
Right now, inflation remains high but over the last three months we have seen some positive signs in Australia that suggested it could start to ease. More particularly, oil prices are now well down on June 2022 and shipping costs have fallen as supply chains have become unblocked. Not surprisingly, this led to a reduction in the market view as to where interest rates would peak. Over the last month however, we have seen preliminary monthly inflation figures from the ABS show that inflation does remain high, driven so much by fuel or supply chains but very large increases in construction costs.
Further driving up where investors see interest rates peaking is what is now happening overseas. Not only is much of the rest of the world seeing much higher inflation than us but there are concerns that some countries are going to head into recession. The country with the biggest problems right now is the UK. Last week, the UK Government announced tax cuts including payroll taxes, income taxes and stamp duty. The measures were introduced due to the threat of a looming recession. But the move is badly timed given that it will further fuel inflation (already at 10 per cent) and will require a lot more borrowing by the government. There are now concerns about Britain’s financial stability. The value of the pound compared to the USD sank to the lowest level ever recorded.
September quarter inflation data will be out later this month however the new monthly ABS preliminary inflation series will continue to give us a more up to date view as to how inflation is responding to sharp rises in interest rates. If the rest of the world heads into recession, hopefully we will once again be the outlier like we were following the Global Financial Crisis.
Nerida Conisbee, Ray White Chief Economist