RBA yield target capitulation signals tighter policy

The RBA’s yield curve targeting experiment ended this week not with a bang but a whimper. Market expectations for a cash rate hike, fuelled by stronger than- expected inflation data, pushed yields well beyond the RBA’s 0.1% target for the April 2024 bond. In a relatively thin market, the RBA had little choice but to let the target fold, at the cost of some credibility in financial markets.

What you will learn:

• We expect the cash rate will be on hold through 2022. Nevertheless, the yield curve has shifted up in recent months, and the short end has now lost its policy anchor. This is already feeding through to higher rates for long-term, fixed rate mortgages, and a similar upward drift can be expected for other borrowing rates in the coming year.
• Our expectation is that the cash rate will be on hold through 2022. However, there is a nascent tightening of monetary conditions occurring, which will be hastened by the end of the yield target.
• Against the backdrop of tighter conditions, the RBA’s Term Funding Facility (TFF) will provide some relief to banks’ funding costs and so lending interest rates.