Earlier this month the futures market had factored in another interest rate rise, maybe even two, before the end of the year. But a cut is now seen as more likely.
The market shows the expected average level for the cash rate, set by the Reserve Bank of Australia (RBA), heading down from its current 4.5 per cent to a low point of 4.35 per cent though October.
That implies a better-than-even chance of an interest rate cut to 4.25 per cent by that time.
The market grudgingly allows that cash might be higher in June 2011 than it is now, but the odds of that - a move to 4.75 per cent - are only slightly better than 50-50, according to the market.
This outlook is radically different from what was predicted just three weeks ago.
On May 5, the day after the RBA raised the cash rate to 4.5 per cent from 4.25 per cent, the futures market fully priced in further a hike to 4.75 per cent in September.
And the benchmark rate was expected to continue rising beyond that, hitting 5.0 per cent by the end of the year and 5.25 per cent by the middle of 2011.
It has been a remarkable turnaround, driven by a combination of factors.
The first was the RBA’s note, released after its board meeting on May 4, that the latest move had lifted the rates facing most borrowers to ‘‘around average levels’’.
This was a goal the RBA had mentioned.
That led many observers to suspect a pause, after six rate hikes in eight months, even though the RBA revised its forecasts for economic growth and inflation upward with the release of its quarterly monetary statement three days after the meeting.
When the minutes of the May 4 board meeting were released with the usual delay of two weeks, the suspicions gained some credence with the RBA’s remark that the rise on May 4 ‘‘would leave monetary policy well placed for the present’’.
That shift in the RBA’s stance would have justified the expectations of a trajectory for the cash rate that was not as steep as previously thought.
After all, those growth and inflation forecasts implied an upward bias for the cash rate, especially the outlook for inflation hovering just below the top of the two to three per cent target range over the coming couple of years.
What has shifted expectations to a point distinctly at odds with the RBA’s official forecasts is unease over the global economic outlook, with the focus on debt-strapped Greece, but more generalised concern over the advanced economies.
The fear is that ultimately the erosion of confidence and financial market disruption in the advanced economies will act as a drag on economic growth in China, whose economy is still oriented toward exporting to the US and Europe.
To date, this is only a fear.
All the evidence so far is that the odds still heavily favour a ‘‘muddle-through’’ scenario, even for Greece. Something has to give.
And unless evidence emerges very soon to show the global economic outlook has worsened significantly, a reassessment of the implausibly benign outlook for interest rates is more likely.
AAP