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The RBA’s Defeat Down Under Should Worry Central Bankers (WSJ)

6 November 2021


The Wall Street Journal title: The RBA’s Defeat Down Under Should Worry Central Bankers
WSJ subtitle: A sudden surge in Australian government bond yields should have other monetary authorities watching their backs
By: Jacky Wong
Date: 3 November 2021

“The bond market has just notched a win in its tussle with the central bank of the land Down Under. As inflationary expectations intensify globally, that could be a preview of things to come for many other central banks world-wide.

The Reserve Bank of Australia said Tuesday that it has scrapped its “yield curve control” policy, which aimed to peg 2024 government bond yields at 0.1%. The policy was introduced last March at the height of the initial spread of Covid-19 internationally and has been tweaked a few times since.

Tuesday’s announcement, however, was different: more of a concession to reality than anything else. The central bank had already effectively abandoned the policy by not stepping in as the market ran amok over the past few weeks.

Yields on two-year Australian government debt rose to 0.78% last Friday from 0.1% at the beginning of October. The surge picked up steam last week after inflation numbers came in higher than expected. The RBA’s governor said Tuesday that the central bank faced a difficult choice between doing nothing or stepping in to defend a yield target that was losing credibility.

Ironically, the RBA’s inaction was the main reason the target had lost that credibility. The RBA’s board might have made the same decision at Tuesday’s monetary-policy meeting anyway, since last Wednesday’s annual trimmed core inflation reading of 2.1% edged back into the RBA’s targeted range of 2%-3% for the first time in years. But having already quietly capitulated to the market move, the bank would likely have been in for an even costlier battle with speculators if it had tried to reconstitute the target ex post facto—especially if future inflation readings kept coming in above expectations.

The episode is a warning for other central banks, which could soon be facing a multitude of similar challenges from the market if inflation keeps surprising on the upside. Short-term bond yields have risen globally, though not as dramatically as in Australia. Two-year bond yields in the U.S. are around 25 basis points higher than two months earlier, for example.

The latest economic figures do point to higher inflation in many places. The difficulty for the central bankers, of course, is to judge whether such inflation is transitory—due to temporary supply-chain issues, for example—or more structural. Central banks may eventually agree that inflationary pressure is real enough to warrant rate increases, but the last thing they want is to be seen as capitulating to market pressure rather than relying on their own judgment.

More real-time tests of their nerve seem very likely soon.”



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