If the debt futures market is right, the Reserve Bank of Australia (RBA) will lift the cash rate by a quarter of a percentage point at each of its upcoming seven monetary policy meetings.
The cash rate, the anchor for all borrowing and lending rates in Australia, is currently 3.25 per cent, after being lifted from its 45-year low of 3.00 per cent earlier this month.
The market is betting that the cash rate will be 5.0 per cent by the end of June.
Assuming the RBA sticks with its usual policy of moving the cash rate by increments of a quarter of a percentage point, that means seven more rate rises between now and the middle of 2010, making it eight rate rises in as many monthly meetings. (There is no meeting in January.)
It would also mean the cash rate would have been moved up by two percentage points in nine months.
Such a rate of change is not unprecedented – the cash rate was cut by four percentage points in the seven months to March last year as the global financial crisis snowballed.
It has been a much longer time since the RBA pushed the cash rate up so quickly.
Back in 1994 when the cash rate rose by 2.75 percentage points in just five months.
Those were different times, of course.
The RBA was keen to defend its two to three per cent target, unveiled for the first time barely a year earlier.
The lesson is that the RBA will ultimately do what seems appropriate for the times.
Several times since August, including in a speech in Perth on Thursday, RBA governor Glenn Stevens has made it clear that means taking the cash rate “towards normal”.
That assessment has been prompted by the a major change to the outlook – the low-probability but high-impact disaster scenario for the global economy is now seen as much less likely to eventuate.
And while that likelihood is sharply diminished, the economic outlook, while looking a bit brighter, is still for a gradual rebuilding of momentum rather than a sudden return to boom times.
Australia’s economy, despite being one the best performing in the world, still grew only 0.6 per cent over the most recently measured year, less than one fifth of its long-run average pace.
So, while the argument for removing the catastrophe insurance element from the cash rate is strong, there is not yet any solid argument supporting a return all the way back to – as opposite to simply towards – normal.
“Normal” is probably somewhere in the region of 5.5 per cent, the average for the inflation-target era beginning early 1993.
The RBA may even see five per cent as more consistent with a neutral setting right now, given that low interest rates overseas are exaggerating the positive impact rate rises are having on the exchange rate, and therefore the negative impact they are having on internationally exposed parts of the economy.
In other words, the futures market is pricing in a rise that will take the cash rate all the way back to “normal” by the middle of next year, if 5.0 per cent is “normal”, or at least by the end of 2010, when the market sees cash at 5.5 per cent.
That would seem to imply a major switch in the outlook underpinning the policy setting, from an apocalyptic view overweighting the possibility that everything will go wrong, to a panglossian future in which everything will go right.
Reality probably lies somewhere between those two extremes, meaning the cash rate is likely to rise less rapidly than the market expects, especially once it gets a little over four per cent and back within the usual range of fluctuation.