Australia's central bank commits to keep 3-year yields low amid bond rout

AUSTRALIA - SYDNEY. Australia's central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields disrupting the country's surprisingly strong economic recovery.

Concluding its March board meeting, the Reserve Bank of Australia (RBA) kept rates at 0.1% and committed to maintaining its "highly supportive monetary conditions" until its employment and inflation goals are met.

Global bond markets have sold off heavily in recent days on speculation the massive monetary stimulus will soon end as economies emerge from the pandemic-induced recession.

Despite the RBA's commitment on Tuesday, Australian bonds sold off with the ten-year futures contract implying an yield of 1.72% compared with 1.66% on Monday.

The local dollar, which has traded near a three-year high, pared some of its losses and was at $0.7762, up from as low as $0.7737 earlier in the day.

In his short post-meeting statement, Governor Philip Lowe did not protest the higher exchange rate but noted that the Aussie was in the upper end of its recent range and would have been even stronger in the absence of monetary stimulus.

Lowe repeated the RBA was committed to the three-year yield target at 0.1% while adding that it would purchase more bonds as needed to support that target.

The remarks follow a global bond market rout last week that saw Australian yields spike to two-year peaks in just a couple of sessions with three-year yields hitting 0.188%.

The bank responded with an aggressive A$3 billion ($2.33 billion) bond buying offer last Friday, and followed up with another A$4 billion in Monday.

MORE QE?

"The market is on notice," ANZ economists said, underlining the RBA's preparedness to buy more bonds if needed.

"The bigger issue for the bond market is the continuation of much better-than-expected data. These support a continued steep curve."

So far, Australia's success in containing the coronavirus has allowed consumer spending to come roaring back from lockdown-induced recession.

Figures due on Wednesday are forecast to show gross domestic product (GDP) grew 2.5% in the December quarter, on top of a 3.3% jump the previous quarter.

The RBA reiterated that wages growth will have to be "materially higher" than it is currently while "significant gains" were required in the jobs market for it to achieve its 2-3% inflation target.

As a result, economists expect the RBA to extend its quantitative easing programme beyond September by another A$100 billion to help achieve its goals.

"Markets though are likely to continue to test the RBA's three-year yield target given the improvement seen in the domestic economy," said Tapas Strickland, economist at National Australia Bank.

Across the Tasman Sea, New Zealand's central bank also emphasised on Tuesday it was in no hurry to tighten policy, seeking to temper market speculation of a quicker end to stimulus.