Since the start of 2015, we have conditioned our forecasts on the assumption that the cash rate moves broadly in line with the path implied
by financial market pricing.
Expectations about the future path of the cash rate will
affect financial market prices and returns, asset prices and the expected prices of goods, services and factors of production (including labour).
Efficient markets mean that there's no such thing as a free lunch, especially on Wall Street:
if financial market prices fully incorporate all relevant information already, trying to beat the market is a hopeless task.
Some central banks, including the Bank of England and the European Central Bank, condition their forecasts on paths implied
by financial market prices; others, including the Sveriges Riksbank and the Norges Bank, condition their forecasts on staff expectations of the future policy interest rate.
A number of alternatives exist, including: the path implied by
financial market prices; a path consistent with the past behaviour of the Bank as summarised by an estimated «monetary policy rule»; or an ad hoc path postulated by staff members.
In contrast, medium - term inflation expectations implied by
financial market prices, which are calculated as the difference between nominal and indexed bond yields, have been broadly stable at around 2.6 per cent over the past nine months.
For that and other reasons,
the financial markets price mortgage REIT shares to offer a drastically higher current yield than other kinds of REITs.