The futures market is predicting a cash rate at the end of the year 1.25 percentage points higher than it is now.
And, who knows, the futures market may be right, but the pace of economic growth suggests otherwise.
The cash rate, the interest rate banks charge each other for loans in the overnight cash market, is the benchmark for all other interest rates in Australia.
Cash is currently at 3.75 per cent after three increases of a quarter of a percentage point in October, November and December.
The futures market has it at five per cent by the end of the year.
Even if the Reserve Bank of Australia (RBA) only lifted the cash rate at half the pace of those three months – a quarter of a percentage point every other month – it would still get there on time.
It’s the retail and business loan rates that really matter for the consumer spending and business investment that the RBA is trying to influence in its never-ending battle against inflation.
The relationship between cash and the rates charged on home and business loans varies with conditions in the money market.
Home buyers were forcefully reminded of that when most of the banks lifted their variable mortgage rates by more than the RBA’s quarter percentage point increase in December.
The RBA takes this into account when it decides on the appropriate cash rate.
That’s why RBA deputy governor Ric Battellino, in a speech in December, noted that other interest rates had risen by about one percentage point more than the cash rate over the past couple of years.
As a result, although the cash rate at 3.75 per cent was still below the low point of its previous cyclical low of 4.25 per cent, other lending rates were above their earlier low points.
“Another way to think about this is that the current level of deposit rates, housing loan rates and business loan rates would have been consistent, before the crisis, with a cash rate of at least 4.75 per cent,” Mr Battellino said in December.
Not long ago, most economists would have estimated a “neutral” cash rate to be around 5.25 per cent, about the average for the period since the RBA adopted its inflation targeting regime in 1993.
Now, with the margin between cash and other rates widening, a cash rate of 4.25 per cent might be seen as neutral.
That means five per cent – as the futures market foreshadows – would be on the tight side as far as policy settings are concerned.
It would, assuming the margin between cash and other lending rates does not change dramatically, have the same effect as a cash rate of six per cent would have had ahead of the global crisis.
For the RBA to push cash up so aggressively would require a sustained run of economic data showing there was a genuine risk of a resurgence in inflation, due to dwindling supplies of labour or spare industrial capacity.
No such evidence has emerged yet.
Sure, the employment figures were a pleasant surprise on Thursday, with unemployment falling to 5.5 per cent and an eight-month low.
But if the trend growth rates estimated by the Australian Bureau of Statistics (ABS) for employment, unemployment and labour force participation were to persist, and the population continued to expand as it did over the past year, it would take more than two years for unemployment to fall even as low as five per cent.
Yes, the economy has grown and confounded near-universal gloomy expectations of a protracted and severe recession.
However, since it emerged from a one-quarter contraction at the end of 2008 it has posted an annualised growth rate of just 1.8 per cent, not much more than half the long-run norm.
And that was with the fiscal policy and monetary policy supercharger dialled up to maximum.
Now the dial is moving in the other direction.
Interest rates are higher and the fiscal boost to the economy is being progressively scaled down.
But the case for policy settings to switch from gradually reducing the boost to actually pressing on the brake pedal is yet to be made.
For that, policy-makers would have to be confident of sustained economic growth fast enough to cut unemployment and use up idle capacity in industry to the extent that prices start to accelerate.
And the data available to date show the economy is simply not growing that quickly.
For a five per cent cash rate 11 months from now to remain the consensus will require data showing the economy is accelerating.
In particular, the December quarter national accounts on March 3 will have to show quarterly growth in real gross domestic product well above the pedestrian 0.2 per cent recorded for the September quarter.