VIEW: RBC On Terminal Rate Matters

RBC note that “there are 5 important factors in the terminal rate discussion:

• 1)QT and balance sheet adjustment. This will play a role in policy normalisation even if the cash rate is the primary tool and is likely to deliver a pause in tightening in H223 given the payback of the first tranche of the TFF.
• 2)A likely staggered lift in the ES rate vs. official cash delivering a lower actual cash rate.
• 3)Elevated and rising pricing of terminal cash in the dollar bloc with upside to Fed funds.
• 4)Mortgage servicing amid elevated debt levels with a lift of 150bp taking servicing back to the decade average pre-COVID.”
• 5)Early comments from Governor Lowe opening the door to positive real cash rates.”
• “On balance, the factors above suggest upside to our 1.50% terminal forecast in 2024 with a choppier path likely after cash moves back to its pre-COVID level of 0.75%. 1.50% cash was the level for an extended period of almost 3 years to mid-2019 and would also imply a mortgage servicing ratio around the decade average prior to COVID. Regardless of what we think, we expect terminal market pricing to remain above 2.00% reflecting increasingly active global central banks in 2022.”