(Bloomberg) -- Australia's central bank was forced back into defending its bond-yield target Friday as markets challenge its sanguine view toward inflation and forecast that interest rates will remain ultra-low until 2024.
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The Reserve Bank of Australia announced an unscheduled operation to buy A$1 billion ($746 million) of April 2024 government securities in the first such purchases since Feb. 26. The yield dropped more than 5 basis points to 0.12% after the announcement, toward the 0.1% target set by the RBA. It had risen above 0.17% this week, testing policy makers' resolve.
"This is a clear signal that the RBA is prepared to defend its YCC target and, more importantly, still believes that rates are unlikely to lift until this target bond matures in 2024," said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada.
"It is a step in both signaling and action which was much needed amid a nervous market that has priced in multiple hikes beginning in the third quarter next year," she said.
Governor Philip Lowe has repeatedly pushed back against bets on early rate rises, pointing out that Australia's wages growth remains subdued and there are few obvious alternative sources of inflation pressure. That contrasts with counterparts in New Zealand -- which has already hiked and is likely to do so again -- and the U.K., where pressure is building for it to begin tightening.
Yet markets haven't been swayed by Lowe's dovish stance, continuing to price in rate-hikes from next year.
Friday's bond purchase comes after the RBA earlier this week temporarily increased the fee that it charges counterparties to borrow the three-year target bond, in order to discourage speculation.
What Bloomberg Economics Says
"After repeated jawboning and an increase in the costs of borrowing the yield curve control bond, the RBA's purchase reinforces its view that a sustainable return of inflation in Australia remains several years away."
-- James McIntyre, economist. Read full not here
The RBA's balance sheet has almost tripled since the onset of Covid-19, driven by the quantitative easing program aimed at supporting Australia's economy through the pandemic. The central bank says it will keep purchasing government bonds at a A$4 billion weekly pace until at least mid-February 2022.
"The market may not have expected this, given yields had risen even as early as this morning," said Martin Whetton, head of fixed income and forex strategy at Commonwealth Bank of Australia, referring to today's move.
There will only be A$12 billion worth of April-24 bonds left in the market after the RBA's latest purchase, added Whetton. "So how long will the market keep testing this one?"
(Updates with comments from economists.)
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