The Reserve Bank of Australia has abandoned its yield curve control policy and became one of the first large central banks to take action against the post-pandemic price surge.
this Central Bank said After a week of turmoil in the short-term bond market, after the Bank of Australia refused to defend its ceiling, yields soared, and on Tuesday it will no longer try to keep the yield on three-year bonds at 0.1%.
This shift makes the Bank of Australia one of the first central banks in advanced economies to tighten monetary policy after the pandemic, and will increase the pressure on the Bank of England to consider raising interest rates when it meets on Thursday.
“The decision to abolish the yield target reflects the improvement of the economy and progress in achieving the inflation target earlier than expected,” said Philip Lowe, the governor of the Bank of Australia, after the central bank’s board of directors meeting.
However, although the Bank of Australia has relaxed its control on the yield curve, it also hinted that it is not eager to raise short-term interest rates and promised to keep interest rates unchanged until inflation continues to stay within the target range of 2% to 3%.
“This will require the labor market to be tightened enough to generate a much higher wage increase than it is currently,” Lowe said. He added that achieving this goal may take some time and that the central bank is prepared to be “patient.”
The Bank of Australia will maintain the overnight interest rate at 0.1% and maintain its commitment to purchase government bonds at an interest rate of 4 billion Australian dollars ($3 billion) until at least mid-February 2022.
The delicate balance between relaxing the yield curve control and promising to keep interest rates low for a period of time illustrates the plight of central banks after the Covid-19 crisis.
Economies that have reopened after the pandemic are facing severe disruptions in global supply chains, putting upward pressure on prices and leading the market to expect interest rates to rise earlier.
The Australian Consumer Price Index increased by 3% year-on-year. Data released last week, Driven by fuel and housing costs.
Although high short-term inflation is disturbing, central bank officials are reluctant to raise interest rates because the economy has not yet fully recovered from the pandemic. They are worried that the deflationary pressure that defined the 2010s and caused zero interest rates in many advanced economies will reappear.
The Bank of Australia adopted yield curve control in March 2020, the first policy adopted by the Bank of Japan. It set the overnight interest rate and the three-year yield to 0.25%, and then lowered it to 0.1% in November 2020.
Under the control of the yield curve, the central bank promises to buy as many bonds as possible to keep the yield below a certain level. This allows it to control long-term interest rates and add additional monetary stimulus when overnight interest rates are already zero.
Last week, the Bank of Australia let the three-year yield exceed the upper limit. After the monetary policy was decided, its transaction price was 0.975%, indicating that overnight interest rates will rise several times before 2024.
This shift made the Bank of Australia the first central bank to withdraw from the yield curve control policy, setting an important precedent for the Bank of Japan, although the Bank of Japan is unlikely to abandon its policy within a few years.
Additional reporting by Hudson Lockett in Hong Kong