Australia’s central bank yesterday kept its key policy settings unchanged, while reinforcing a commitment to its three-year target following a campaign of shock-and-awe in bond markets.
Reserve Bank of Australia Governor Philip Lowe and his board held the cash rate and three-year yield target at 0.10 percent, the bank said in a statement.
It increased bond purchases over the past week as it sought to soothe markets in the face of a global bond rout.
Photo: EPA-EFE
“The bank remains committed to the three-year yield target, and recently purchased bonds to support the target and will continue to do so as necessary,” Lowe said. “Also, bond purchases under the bond purchase program were brought forward this week to assist with the smooth functioning of the market.”
After the upheaval in yields over the past week, market reaction was muted yesterday.
The 10-year yield spiked 7 basis points higher, while the three-year yield moved further from its target to 0.13 percent, suggesting that markets will continue to test the central bank with reflation bets.
Central banks and bonds markets are locked in a showdown as efforts to keep borrowing costs low are being tested by inflation bets amid a rapid global economic recovery.
Policymakers have pushed back on the rising tide of yields, emphasizing that any short-term spike in inflation would prove temporary.
Australia has found itself on the front line of this struggle as a commodity powerhouse with a strengthening economy.
Its central bank last week bought A$7 billion ($5.4 billion) of government securities in defense of its three-year target, including an unscheduled operation on Friday.
It followed up on Monday by doubling its usual purchases of longer-dated debt, spurring the biggest drop in yields in a year.
“The bank is prepared to make further adjustments to its purchases in response to market conditions,” Lowe said. “The current monetary policy settings are continuing to help the economy by keeping financing costs very low, contributing to a lower exchange rate than otherwise, and supporting the supply of credit and household and business balance sheets.”
The low cost of borrowing is fueling a rapid rebound in property with the housing market recording its largest monthly gain in 17 years and lending reaching a record high in January.
“Housing credit growth to owner-occupiers has picked up, but investor and business credit growth remain weak,” Lowe said. “Lending standards remain sound and it is important that they remain so in an environment of rising housing prices and low interest rates.”
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