Short-term interest rates have fluctuated over the past few months, though, in net terms, have shown little change since the last month. Three-month money market rates rose in March as market participants revised upward their expectations for further tightening in monetary policy in the light of indicators of stronger economic activity. By late March, markets were expecting a rise in the cash rate, to 6½ per cent by mid year. Those expectations were significantly reduced following the release of the lower-than-expected March quarter CPI figures in late April. The market currently expects around a 50 per cent chance of a tightening of monetary policy by the end of the year.
Long-term interest rates have also fluctuated but shown little net change since the last Statement Those on 10-year nominal bonds are now around 5.8 per cent, despite having initially fallen to 5.6 per cent in early March. While developments in US markets continued to have the major influence on local yields, the relative strength in domestic indicators has seen the spread between Australian and US yields widen to around 120 basis points from around 100 basis points at the time of the last Statement.
Yields on inflation-indexed bonds are also unchanged in net terms since early February, with implied inflation expectations remaining a little above 3 per cent. Yields on inflation-indexed bonds have in recent years been lower than they otherwise would have been due to the lack of new issuance and institutional factors which have boosted demand. This has reduced the usefulness of these yields in providing information about movements in inflation expectations.