As bizarre as it may seem, financial markets are pricing in no change in interest rates for the rest of the year, and at one stage were even factoring in a 20 per cent chance of a cut next week.
But before homeowners and other borrowers alike get too excited, these expectations are unlikely to turn into reality.
It is the result of the renewed upheaval in financial markets and is part of the rollercoaster ride that both the Australian dollar and the share market have endured in recent weeks.
And there has been plenty for markets to fret about – eurozone debt worries, political uncertainty in the UK, social unrest in Thailand and fears of a property crash in China to name just a few.
The latest twist, and a positive for markets, was China’s denial that it was reviewing its massive holding of the euro and eurozone debt.
But as Westpac’s London senior economist James Shugg told ABC Lateline Business, “if you were contemplating maybe selling an important asset like that, you wouldn’t announce to the market before you did it, would you”.
Still, the denial helped to lift the Aussie above 85 US cents on Friday, having crashed towards 80 cents a week ago – its lowest level since July 2009 and a 12 cent drop this month.
You can question why you would hammer the Aussie dollar when Australia’s government debt and deficit pales into insignificance when compared to the likes of Europe.
But it doesn’t necessarily matter what the economic fundamentals are when markets get the jitters.
When risk aversion takes hold, it normally means markets sell commodities and commodity currencies like the Aussie, and buy safer securities like US Treasuries.
“You can change from a raging bear to rampaging bull in the blink of an eye lid,” Commonwealth Bank chief economist Michael Blythe said.
But as for any chance of a rate cut next week, forget it.
“It just shows how far out of whack things have got,” Mr Blythe said in regard to the pricing in wholesale interest rate markets.
Still, nor does he expect that the Reserve Bank of Australia (RBA) will lift the cash rate again at next Tuesday’s monthly board meeting, having raised the rate for three months in a row, and a total of six times since October last year.
“There comes a point where you have to take a bit of a breather and try to assess what sort of impact they have had on the economy,” he said.
“The risk aversion we have seen in the last couple of weeks, probably just reinforces their desire to sit on the sidelines.”
Still, don’t get too comfortable.
The quarterly consumer price index result due in late July could well trigger another rate rise in August.
The Organisation for Economic and Development’s latest Economic Outlook released this week gave an upbeat appraisal of the Australian economy, but expects the RBA’s monetary policy tightening will continue.
In fact, the Paris-based institution said rate rises could become more rapid if rising confidence and favourable international trade conditions lead to more buoyant demand.
Still, it also said there are negative risks to the economy that “must not be underestimated”, such as the pace of the global recovery and international financial market volatility.
RBC Capital Markets senior strategist Sue Trinh said it is unclear at this stage how the current bout of risk aversion and potential downside risk to eurozone growth will flow through to global growth and ultimately Australian inflation.
“We suspect some slight dampening of global growth would be tolerable to the RBA given the extremely limited inflation headroom,” she said.
In the central bank’s latest quarterly monetary policy statement released this month, it forecast inflation being at around the top of its two to three per cent target band for the next few years.
The other key event next week – on the economic front at least – will be Wednesday’s release of the March quarter national accounts.
Components to the national accounts released so far suggest that gross domestic product (GDP) is unlikely to be a blockbuster.
We know that the private sector side was soft with retail spending was very weak in the first three months of the year, home building subdued and business investment declining.
The final GDP components due early next week – business profits and inventories, the balance of payments and government finances – should at least point to growth in both government spending and exports.
“The bottom line won’t be too bad, but it will be fully dependent on the public sector to keep us a float,” Mr Blythe said.