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‘Reputational damage’: Reserve Bank of Australia’s mea culpa over yield target experiment

The Reserve Bank of Australia says its exit from a three-year yield target was disorderly and caused some reputational damage, adding that it’s unlikely to deploy such a program again.

The RBA on Tuesday released the findings of a review into its 20-month experiment with yield control that ended in November 2021 when intensifying inflation pressures across major economies triggered a global bond rout. In a statement at the time, governor Philip Lowe acknowledged he was effectively bowing to market forces.

As part of its review, the central bank:

  • Agreed to strengthen the way it considers the full range of scenarios when making policy decisions, especially where they involve unconventional policy measures
  • Found that while the target was met for the bulk of the period, “the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market. This experience caused some reputational damage to the bank”.
  • The yield target’s effectiveness as a monetary policy tool waned as markets reassessed their views of the outlook for the cash rate
  • The bank will review its bond purchase program later in 2022

The RBA targeted the three-year government bond yield as part of a suite of policies designed to support Australia’s economy through the COVID pandemic. The target was designed to amplify the impact of the relatively small cash-rate reductions still available to policymakers at the time.

While the board found it worked for the bulk of the period, the ending was messy and cost some investors money, prompting frustration in markets.

The bank has also been criticised over its forward guidance that suggested interest rates would remain at a record low until 2024, a view reinforced by the YCC program.

“The combination of a yield target and language around the ’central forecast’ of not expecting rates to rise until 2024 overshadowed efforts to emphasise that the forward guidance was state-based rather than calendar-based,” the review said.

“This highlighted an inherent tension between the strong language required to support a yield target and state-based forward guidance.”

At the start of the pandemic, Mr Lowe said rates were unlikely to rise before 2024 and was still holding to that view late last year — despite economists and traders bringing forward their forecasts. Surging inflation finally forced the RBA’s hand in May, when it raised by 25 basis points, following that up with a half-point hike this month.

The RBA now faces its first review in a generation as new Treasurer Jim Chalmers seeks to ensure Australia’s monetary policy making is up to date and in line with global peers.


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