RBA Abandons Unconventional Yield Target Policy In Historic Policy Move

(This was first published at 3:06 PM)

By Sophia Rodrigues

(Sydney, November 2, 2021)—The Reserve Bank of Australia announced an end to its yield target policy on Tuesday, the first central bank to end this unique unconventional policy.

At the same time, the RBA also removed any notion of time-based guidance by dropping timeframe for rate hike.

The only other central bank to pursue yield curve control is the Bank of Japan and its policy has been ongoing since 2016.

At the board meeting Tuesday, the RBA left its cash rate target unchanged at 10bps and the continuation of bond purchase program at the rate of A$4 billion a week until at least mid-February 2022.

The RBA said it is discontinuing the target of 10bps for the April 2024 Australian government bond.

“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” the RBA said.

The RBA introduced three-year yield target policy in March 2020 at 0.25% and dropped it to 0.10% in November that year. In July this year, the RBA moved to bond target policy, targeting yield of 0.10% on the April 2024 government bond.

The RBA said that given other market interest rate moved in response to the increased likelihood of higher inflation and lower unemployment, “the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”

Despite the “hawkish” decision on yield target policy, the statement had some dovish tones.

The RBA said its forecast is for underlying inflation is for no higher than 2.5% at the end of 2023 and for only a gradual increase in wages growth. In saying so, the RBA has removed the inconsistency it previously had where the timeframe suggested time-based guidance.

The RBA’s labor market forecasts appear conservative, with the unemployment rate expected to drop to 4.25% at the end of 2022 and 4% at the end of 2023. Both are unchanged from August forecasts.

Forecast for underlying inflation was upgraded with RBA expecting 2.25% over 2021 and 2022, and 2.5% over 2023. In August the forecast was for 1.75% per cent over 2022 and 2.25% per cent over 2023. 

The forecast for wage price index was also upgraded with 2.5% seen over 2022 and 3% over 2023.

The RBA said the main uncertainties relate to the persistence of the current disruptions to global supply chains and the behaviour of wages at the lowest unemployment rate in decades.

One important source of uncertainty continues to be the possibility of a further setback on the health front, the RBA added.

--Contact: Sophia@centralbankintel.com