Interest rate pundits are forever discussing the outlook for monetary policy and what it might mean for your mortgage and business loan.
Will the next move in official interest rates set by the Reserve Bank be up or down?
When is the next interest rate move likely?
And then, how high or low will interest rates go in this cycle?
The debates are often interesting and enlightening. The arguments supporting the case for a particular path for future interest rates are well considered, usually backed up with a range of facts and judgments on the likely outlook for the economy, inflation, wages and unemployment.
And as we all know, sometimes these forecasts are right, often they are not.
This is not to say the arguments and scenarios are not worth having.
On the contrary, they are vital to help determine the risks to the economy over the next year or two. They can form the basis of policy adjustments that help maintain a decent rate of economic growth, with inflation within the target and the unemployment rate as low as possible.
For many with an interest in the monetary policy outlook, the debating points are often riddled with jargon and ‘economist speak’.
If you wish to avoid the ins and outs of this debate, but still want to have a rough idea of where official interest rates might be heading, you can always refer to the money markets.
In the futures market, for example, or the market for overnight index swaps (please keep reading, don’t let this terminology put you off), you can see what investors are saying, with their money, about the outlook for interest rates.
Arguably, the money markets are better than the pundits in picking the future course of rates as investors are putting their money where their mouth is in judging where rates might go, rather than pontificating over the policy issues.
Suffice to say, that at the moment, the money markets are suggesting no chance of an interest rate change before the end of 2018 and only a moderate change of one 25 basis point interest rate rise by the end of 2019 and only once we get to the futures in the middle of 2020, there is one lousy 25 basis point rise in interest rates priced in.
Anyone fearing a series of interest rate rises, as some pundits are forecasting, can take comfort from this market pricing.
Well, perhaps they can.
This is because money markets are not infallible. Market pricing of interest rates changes as new information comes to hand. A low inflation reading or a jump in unemployment can, for example, see pricing for interest rate changes move sharply.
At the end of 2017, for example, the futures market was pricing in two 25 basis point interest rate rises such was the optimism about the economy outlook and the expectations for a lift in inflation.
And while the market pricing currently favours a small interest rate rise – eventually – there is growing chatter that by the end of the year, interest rate cuts will be priced in for 2019.
The rate cut scenario is built on concerns stemming from the falls in house prices, the fact the unemployment rate is still high, the sluggishness in wages growth and strong possibility that inflation will remain at or below the bottom of the RBA target range for another year.
Suffice to say, the interest rate outlook is increasingly up in the air, even though all but one economist surveyed by Bloomberg expects interest rates to be up or steady over the next 18 months.
If there is a growing possibility that the next move is in fact down, my hunch is that the market will price cuts in well before the consensus of market economists moves there.