Aussie central bank refuses to defend its bond target even as yields climb
- RBA skips opportunity to buy April 2024 target bond
- Bond yields climb to 0.46% vs. 0.1% target
- Fuel market bets on rate hikes from May 2022
SYDNEY, October 28 (Reuters) – Australia’s central bank on Thursday jumped an opportunity to buy a government bond that is the keystone of its stimulus package, pushing yields above target and fueling market bets on an anticipated rise in interest rates.
The Reserve Bank of Australia (RBA) refused to buy the April 2024 bond as part of its regular market operations, even though yields were well above its target of 0.1%. The market responded by pushing the yield further to 0.46%, challenging the central bank to defend its commitment.
The yield target is at the heart of the RBA’s argument that the 0.1% spot rate will not rise until 2024, so any failure to maintain it is fueling market bets that rates will have to increase sooner.
Interest rate futures slipped to involve a move as early as May, while three-year bond futures fell 14 ticks to their lowest since mid-2019 at 98.725.
“The markets are now forecasting a tightening of 50 basis points by the middle of next year and 100 basis points by the end of the year,” said Tapas Strickland, chief economic officer and markets at NAB.
“For a central bank that keeps rates unchanged until 2024 and targets the April 2024 bond at 10bp, it must be like watching a horror movie.”
Investors have for some time doubted that rates could stay at 0.1% until 2024, as supply bottlenecks and soaring energy prices are pushing up inflation in the country. the world.
The doubts seemed justified on Wednesday when data showed Australia’s core inflation rate topped a six-year high of 2.1% in the last quarter, bringing it within the RBA’s target range of 2 at 3% two years earlier than expected by policy makers. Read more
Asked about inflation in a parliamentary hearing, RBA Deputy Governor Guy Debelle stayed on the sidelines, saying only the policy was aimed at getting more inflation, but not “much more “.
ALL EYES ON THE RBA MEETING
The offshore events added to the drama with the Bank of Canada stunning the markets on Wednesday by ending its bond purchases and signaling a rise as early as April. Read more
The RBA is now under intense pressure to do something at its monthly policy meeting on November 3, either defend its yield curve target, loosen it, or abandon it altogether.
“While we think the RBA is unlikely to abandon it so soon, it is a risk,” said Gareth Aird, head of Australian economics at CBA.
He noted that the prospects for the national economy had been strengthened by exceptional recourse to vaccination, with 75% of the adult population having received two doses, while the labor market had proved to be much more resilient than expected. feared him.
Baird now expects a first rate hike to 0.25% in November next year, compared to May 2023 previously, followed by four more moves to 1.25% by the third quarter of 2024.
“Overall, we expect this to be a shallow and gradual tightening cycle given the high level of household debt.”
Westpac chief economist Bill Evans has maintained his call that rates will not rise until February 2023.
By then, he expected core inflation to be above 2.5% for three consecutive quarters and unemployment to fall to 3.8%, far from the current 4.6%.
“The markets continue to be ahead of the likely RBA timeline where the political approach has shifted to foster patience,” Evans said, although he also argued that it was time for the RBA to admit that rates were unlikely to stay at 0.1% until 2024.
Reporting by Wayne Cole; Editing by Himani Sarkar and Richard Pullin
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