Today’s announcement merely made formal what was apparent on Thursday: the bank is no longer going to spend public funds defending a line that might eventually be crossed.īond traders thought the improving economic outlook meant the bank would have to lift its record low cash rate sooner that it had said it would. It initially bought enough bonds to defend the rate and then, without warning, capitulated last Thursday, as good as withdrawing from the market and allowing the rate to climb to a high of 0.70%.īy Monday the rate had climbed to more than 1.00%, more than ten times the Reserve Bank’s target. On October 15, the three-year bond rate started to climb above the bank’s target of 0.10%. Over the next 18 months it intervened in the market only occasionally, and only in small amounts. Markets believed it would do whatever was needed to defend it. The new three-year rate became the new norm. It took the bank just 11 days and A$27 billion dollars of bond purchases to achieve its first target, establishing ultra-low interest rates for years into the future.Īfter that, it didn’t need to spend much. The decision created a reasonable expectation the cash rate would remain close to zero until 2024. Responding to an improving economy, the bank decided at its July 2021 meeting not to extend the program bond target beyond April 2024. Later, it cut the target for three-year bond yields (and the target for its cash rate) to a near-zero 0.10%, further lowering the cost of borrowing.
When COVID hit last year, the bank announced it would buy enough government bonds to keep the yield on the three-year bond at 0.25%, as good as guaranteeing money would be cheap for years to come.
Why control the yield curve in the first place?
Until today it had a formal target for the three-year bond yield of 0.10%, enabling banks to provide three-year fixed mortgages very cheaply, and indicating the cash rate wouldn’t climb above 0.10% until the most recent three-year bond expires in April 2024.īut it has now abandoned the target, a full two years early. The Reserve Bank of Australia had a Cup Day surprise in store for the country, announcing it was abandoning its policy of “ yield curve control”, meaning it was no longer going to defend any particular interest rate for borrowing over any particular duration.
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