RBA vows to keep rates low

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    The Reserve Bank of Australia says it will do whatever it takes to keep the cash rate low, even as investors sell bonds as fears of inflation abound.

    The RBA said it was prepared for another round of bond-buying – which economists peg at $100 billion – after its current $200 billion bond-buying program is completed in the coming months, according to a report by The Australian.

    However, money market investors continued to doubt the central bank’s commitment to keep the cash rate low as the economy recovers, pushing bond yields higher even as the RBA maintained that it still did not expect to raise the cash rate until 2024.

    In a statement released following the monthly board decision on monetary policy, RBA Governor Philip Lowe said he didn’t expect the cash rate to rise from its current level of 0.1% within three years, although he did acknowledge that the economy was recovering faster than expected.

    “In Australia, the economic recovery is well under way, and has been stronger than was earlier expected,” Lowe said. “The recovery is expected to continue. … GDP is expected to return to its end-2019 level by the middle of this year.”

    Lowe said the RBA would maintain its three-year government bond yield target of 0.1% and was willing to “make further adjustments” to its bond-buying programs to “assist with the smooth functioning of the market.”

    Despite the RBA’s commitment to keeping yields low, the benchmark 10-year Australian Government bond yield spiked as much as eight basis points on Tuesday following the central bank’s announcement before trading at 1.722%, up around six points, late in the session, The Australian reported. Meanwhile, local shares reversed an early gain, with the S&P/ASX 200 index closing down 0.4%.

    Read more: Low rates could lead to inflation risk – former RBA chief

    KPMG chief economist Brendan Rynne said that the bond yield spike and the market drop were both due to expectations that the RBA will be forced to lift the cash rate before 2024.

    “Clearly there is a difference of expectations between what the market is believing is going to happen in the short to medium term around interest rates compared to the rhetoric that is being provided by the Reserve Bank,” Rynne told The Australian. “That’s not to say the market’s anticipating the cash rate to go up immediately, but whether or not the RBA can hold on at historically low levels remains to be seen.”

    Rynne said that KPMG predicted a hike in the cash rate sometime next year.

    “From an economic growth perspective, it is probably going to be in towards the second half of 2022 when you are going to start needing to look at raising the cash rate if the economy is performing strongly,” Rynne said.

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    Original Article