Where to next for interest rates?

The next RBA Board meeting and Official Cash Rate announcement will be on July 2.

As at the close today, the ASX 30 Day Interbank Cash Rate Futures July 2013 contract was trading at 97.365, indicating a 49% expectation of an interest rate decrease to 2.50% at the next RBA Board meeting.

So it's effectively a coin flip or a 50:50 bet for July.

I tend to favour a wait and see approach; others like to see the RBA get 'ahead of the curve'.

For what it's worth, I feel that the RBA might just as well wait until after the next round of CPI data on July 24 - inflation is what the central bank 'does' after all - though I don't expect the next CPI print to throw up any worries just yet.

Either way, recent data sets including the disappointing GDP print of 0.6% and others lead me to suspect that we'll be heading to 2.50% sooner rather than later, perhaps by August.

Plenty of commentators are going to great lengths to highlight the slow response of the housing markets to interest rate cuts.

Hmm...maybe yes, but also don't forget that interest rate cuts can take a long time to 'flow through' - perhaps up to 18 months for the full effect to be felt - and housing finance figures have been steadily rising for some months now. 

I wouldn't be writing off the housing recovery just yet, although the forthcoming election certainly might lob a decelerating spanner in the works.

Anyways...here's what the futures markets imply, which is basically a rate cut by August and perhaps yet another by around March 2014, by which time we'll know with far more certainty how the property markets are responding.

Thereafter the yield curve implies that consumption and construction will have started to respond and the Australian economy will resume on an upwards path.

Hopefully so, but we must acknowledge that there is likely to be some level of higher unemployment in this cycle. 

Mining construction is a labour-intensive affair - more so that mining production - so there are likely to be some employees out of work as the great rebalancing takes place.

As for what the blip in the yield curve at January 2014 represents...?

Source: ASX