Cash Rate Futures and What Markets Price

Key takeaways

• The contract settles on the average cash rate over the month.
• Implied rate = 100 minus the futures price.
• The "probability" is derived arithmetic, not a survey.
• Prices move continuously, so a snapshot dates within hours.

How does the contract work?

The ASX 30-day interbank cash rate futures contract settles against the average of the RBA's interbank overnight cash rate over the calendar month. Pricing follows the standard convention: the quoted price is 100 minus the implied interest rate, so a price of 95.75 implies an average cash rate of 4.25% for that month.

Because settlement is on a monthly average rather than an end-of-month level, the timing of a decision within the month matters. A change taking effect mid-month affects only part of the averaging period, which is why the arithmetic for deriving an implied probability has to account for the meeting date.

The participants are banks, funds and other institutions hedging or expressing views on rates. That is what makes the price informative - it reflects positions people have money on, not opinions they have offered.

How is a probability derived?

By interpolation between the two outcomes. If the current cash rate is 4.35% and the market is pricing an average that sits partway between 4.35% and 4.60% for the relevant month, that intermediate position is expressed as a percentage chance of a 25 basis point increase.

The important caveat: this is not a probability in the sense of a poll. It is an expectation embedded in a price, influenced by hedging demand and risk preferences as well as by beliefs. Markets are frequently wrong, and "fully priced" describes positioning, not certainty.

Should a borrower watch them?

For context, occasionally. For decisions, rarely.

The reason is that fixed rates already incorporate this information. Lenders price fixed loans off swap rates, which embed the same expectations plus a term premium. By the time you read that a hike is fully priced, the fixed rate you would be offered has already moved.

So watching cash rate futures does not give you an edge on when to fix. What it does give you is a check on your own assumptions - if you believe rates are about to fall sharply and the market does not, it is worth asking what you know that thousands of institutional participants do not.

Related instruments work the same way. Forward rate agreements let parties lock a future interest rate for a period, and overnight index swaps price expected average overnight rates over longer horizons. They all express the same expectations through different contracts.

Frequently asked questions

What are ASX cash rate futures?

30-day interbank cash rate futures traded on the ASX, settling against the average RBA cash rate over a calendar month. They are the primary instrument from which market expectations of RBA decisions are derived.

What does "fully priced" mean?

That the futures price implies the market expects the change to occur. It describes positioning rather than certainty - markets are regularly wrong, and a fully priced move can fail to happen.

How is the implied rate calculated?

The quoted price is 100 minus the implied interest rate, so a price of 95.75 implies 4.25%. Deriving a probability of a specific decision also requires accounting for where the meeting date falls within the month, since settlement is on a monthly average.

Should I use market pricing to decide when to fix?

It rarely helps. Fixed rates are priced off swap markets that already embed the same expectations, so the information is in the rate you are quoted before you read about it.

Related reading

• How Swap Rates Determine Your Fixed Home Loan Rate
• Term Premium and Fixed Rate Pricing
• What "Data Dependent" Really Means

Sources

• 30 Day Interbank Cash Rate Futures — ASX
• The Australian money market — Reserve Bank of Australia