Interest rates will rise but cap out pretty quickly

Whether the RBA raises rates this week or by how much isn’t really the story to focus on. Instead we’re focused on what happens in 2023. What I’m watching in the market is future interest rate expectations and they’re starting to come down after a couple of months of panic.

Take for example the Aussie 2 year bond yileds, down from the mid 3% range last month to around 2.5% as of the time of writing. That’s a big fall, following a big jump.

What we’ll probably see tomorrow is a 50bpts increase from the RBA and words following through to ease any concerns around inflation. But hidden somewhere will be a “relax” call, in that we aren’t going to see rates go to the moon.

In the US last week the markets got excited by the use of the word “neutral” by the Federal Reserver Governor. That sent a message to the market that a 2-3% cash rate for most developed economies (with the exception of Japan and Europe) should do the job. We’re moving to that range rather quickly, but once we get there, we’ll probably sit at that level and do little movement.

Bottom line: We’ll be looking for those “relax” signals in the RBA commentary out tomorrow. The rate will rise, but as the market is already starting to signal, rate rises will start to cap out pretty soon and all eyes will quickly start to focus on what happens in 2023 where we will probably start to get cuts.

A 2% cash rate is where we were pre covid and I believe that’s where we will settle at next year.