RBA ‘doubles down’ to stem the flow
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Posted 03/03/2021
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Yesterday the RBA kept things unchanged, maintaining both the cash rate at 0.1% and its $200 billion QE program until it sees sustainable and strong wage growth together with low unemployment.
Despite fears this cheap money program will cause out of control inflation and an artificially overheated economy, the RBA maintain we are nowhere near that and they don’t see their target of 2-3% inflation being reached until 2024 at least. They stressed again they will need to see “actual” inflation, not ‘expected’ and wouldn’t hesitate to buy even more government debt “if necessary” to keep things heating up.
We saw this in full effect on Monday, just the day before their meeting, when, in response to the rising yields in the US, our own 10yr bond spiking up 20bp to 1.93% and the AUD hitting 80c (as we reported here) the RBA bought double the usual amount of bonds under their program to try and stem the sell off and lower yields.
Australia’s RBA remains one of the few central banks in the world employing Yield Curve Control (YCC). As we explained last year:
“YCC sees the [central bank] target controlling longer term yields by buying (or selling) as many long term bonds as necessary to achieve the target yield. As we’ve explained before, yields are normally higher for longer term bonds (say 10 or 30 year) than shorter terms of say 2 years on the logical basis of the risk of return over a longer period. Banks use this to make money by selling you debt at that higher rate than that they buy at the lower rate and pocketing the difference.”
However the RBA is incentivised to keep longer term yields as low as possible to encourage more borrowing at low rates for public, corporate and household debt for things like houses and cars to keep the economy going. It’s also a means to lower the AUD and try and encourage their beloved inflation to reduce the very debt burden they are blowing up. You can see trap right?
The Aussie house market is again on fire. That is all according to plan. Get a home loan in the 2%’s and see it go up 10% equals free money! The problem is that wage growth is pretty much stagnant. And so down the track when, not if, interest rates increase and the servicing of the mortgage starts to bite what happens to property prices? As pointed out above, the banks take their cue from the longer term cost of debt. At the moment the RBA is controlling that through YCC. How long they can do this is the golden question. From the AFR yesterday:
“The last thing the RBA wants to do right now is sound more hawkish than it previously has, given that will only be interpreted as validating the sell-off in rates,” said Commonwealth Bank’s head of Australian economics, Gareth Aird.
“In turn that would put upward pressure on interest rates and make it harder to defend the 0.1 per cent target on the three-year Australian government bond. In addition it would put unwanted upward pressure on the Australian dollar,” he said.
Still, Commonwealth Bank believes that an ongoing improvement in the domestic economic data “will ultimately force the RBA’s hand to do something about yield curve control this year".”
We are in delicate territory and as we have discussed at length of late, the recovery party is in an artificially stimulated environment that is starting to look under pressure with the market, not central banks, pricing in higher yields. As sure as night follows day, the Fed will step up to try and snuff this out. Printers will go brrrrr and the inflation coil gets wound tigher.
In such uncertain times, when things just simply don’t make sense, balancing your wealth is crucial to manage risk.