Australia’s central bank admits exit from yield target was disorderly and damaging

SYDNEY, June 21 (Reuters) – Australia’s central bank said on Tuesday that its pandemic stimulus program aimed at keeping short-term bond yields low had been successful for much of its life, but the exit was disorderly and caused the bank “reputational damage”.

In a review of its yield target, the Reserve Bank of Australia (RBA) said it was unlikely to use a yield target again, preferring to simply buy bonds for fixed amounts across all maturities.

In particular, it was now clear that the 21-month experiment with the performance target should have ended earlier and that any new program would be shorter.

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“The target was met for most of the period, but the exit at the end of 2021 was disorderly and associated with bond market volatility and some market dislocation,” the RBA said. “This experience has caused damage to the Bank’s reputation.”

The program began in March 2020 as part of a massive pandemic stimulus package. It initially aimed to keep Australian three-year government bond yields around 0.25%, although it was lowered to 0.1% later that year.

For most of its life, the plan has worked to keep market yields and interest rates lower than they otherwise would have been and to exert downward pressure on the local dollar.

However, at the end of 2021, yields began to rise as the market began to price in the risk of an earlier than expected increase in the cash rate.

The RBA initially bought bonds to defend the target, but in late October pulled away from the market, pushing yields higher and causing heavy losses on bond futures.

“The end of the yield target was difficult for a number of financial market participants, including those who expected the target to continue,” the RBA said.

“Furthermore, the Bank’s purchases to defend the yield target came at a financial cost given the subsequent rise in yields.”

As a result, the RBA’s decision-making council has agreed to strengthen the way it considers all scenarios when making policy decisions, particularly when they involve unconventional policy measures, according to the review.

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Reporting by Wayne Cole; Editing by Sandra Maler and Richard Chang

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