Interest Rate Forwards
Market Rate Forecasts
The indicator calculates a percentage probability of an RBA interest rate change based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures.
The zero coupon bond yield curve implied forwards are derived through bootstrapping, interpolation and smoothing the specific yields on individual Australian Government Bonds.
Generally the spot interest rates futures market is much more responsive and elastic to changes in market conditions than the bond market. This is due to the limited range of bond instruments and the smoothing applied through the Nelson Siegel interpolation.
Accuracy of Market Implied Rate Forecasts
The prediction interval illustrated above reflects the average of the deivation between market implied forward rates and the actual cash rate over the selected period. Over the full available sample, at a 12 month horizon the absolute deviation is typcially plus or minus 1 rate cut (ie 0.25 percent). The absolute deviation between the market implied forecast (f) and the actual cash rate (r) is calculated as:
Includes the P99th and P90th quantiles of the absolute error distribution.
Sources