Australian central bank stops buying bonds as a sign of change in quantitative easing
The Reserve Bank of Australia refused to defend its bond yield target, a pillar of its quantitative easing program, triggering what one trader called “carnage” in the country’s sovereign bond market.
Markets on Friday pushed the Australian government bond yield from April 2024 to more than 0.7%, exceeding the central bank‘s target level of around 0.1% after the bank chose not to not intervene. Yields move inversely with bond prices.
Australia is the second country this week to abruptly halt its bond buying program, after the Bank of Canada surprised investors on Wednesday by signaling a shift towards tightening monetary policy.
The RBA’s move comes amid growing expectations that interest rates will rise as early as next year.
The Reserve Bank of New Zealand raised rates for the first time in seven years this month, following actions by Norway and South Korea.
The RBA’s decision not to intervene sent shock waves through the country’s sovereign bond market, with yields on its 10-year bonds jumping 0.11 percentage points to 1.955%, marking their highest level in two and a half years.
“The RBA is just not showing up to defend its return target, bonds are shot,” said a fixed income trader, also describing the latest measures on Australian, New Zealand and Canadian bond yields as a “massive carnage”.
“Quantitative easing is taking off and it’s very messy,” he added. “We’ll see how long the Fed and the ECB can hold out.”
Analysts had predicted that the RBA could officially abandon its yield targeting program as early as next Tuesday, when the central bank’s board is due to meet.
David Plank, head of Australian economics at ANZ, said the central bank’s decision not to intervene was “implicit confirmation” that it would drop the program.
“They obviously decided not to bother to make the effort today, given that on Tuesday they will probably announce the end anyway,” he said, adding that a more read Stronger-than-expected consumer inflation released Thursday had helped strain the RBA’s hand.
The Consumer Price Index released this week showed that core inflation, the central bank’s preferred measure, was breaking its target range of 2-3% for the first time since 2015.
Economists at Bank of America Securities predicted this week that the RBA would begin raising rates in the fourth quarter of 2022 “in light of today’s data which indicates a faster and more sustained rise in inflation.” He previously said the bank would keep rates until the end of 2023.