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RBA signals the end of ultra-cheap money. Here’s what it will mean

Isaac Gross, Monash University

The Reserve Bank of Australia had a Cup Day surprise in store for the country, announcing it was abandoning its policy of “yield curve control”, meaning it was no longer going to defend any particular interest rate for borrowing over any particular duration.

Until today it had a formal target for the three-year bond yield of 0.10%, enabling banks to provide three-year fixed mortgages very cheaply, and indicating the cash rate wouldn’t climb above 0.10% until the most recent three-year bond expires in April 2024.

But it has now abandoned the target, a full two years early.

Why control the yield curve in the first place?

When COVID hit last year, the bank announced it would buy enough government bonds to keep the yield on the three-year bond at 0.25%, as good as guaranteeing money would be cheap for years to come.

Later, it cut the target for three-year bond yields (and the target for its cash rate) to a near-zero 0.10%, further lowering the cost of borrowing.

Responding to an improving economy, the bank decided at its July 2021 meeting not to extend the program bond target beyond April 2024.

The decision created a reasonable expectation the cash rate would remain close to zero until 2024.

What did yield curve control achieve?

Yield curve control achieved a lot. It took the bank just 11 days and A$27 billion dollars of bond purchases to achieve its first target, establishing ultra-low interest rates for years into the future.

After that, it didn’t need to spend much. The new three-year rate became the new norm. Markets believed it would do whatever was needed to defend it.

Over the next 18 months it intervened in the market only occasionally, and only in small amounts. That all changed last week.

On October 15, the three-year bond rate started to climb above the bank’s target of 0.10%. It initially bought enough bonds to defend the rate and then, without warning, capitulated last Thursday, as good as withdrawing from the market and allowing the rate to climb to a high of 0.70%.

By Monday the rate had climbed to more than 1.00%, more than ten times the Reserve Bank’s target.

Trading Economics

Today’s announcement merely made formal what was apparent on Thursday: the bank is no longer going to spend public funds defending a line that might eventually be crossed.

Bond traders thought the improving economic outlook meant the bank would have to lift its record low cash rate sooner that it had said it would. It lost the will to disagree.

In a 4pm press conference Governor Philip Lowe said that to maintain the target would have been untenable. Eventually the bank would have owned all the three-year bonds on offer.

What will this do to the housing market?

Today’s decision is a sure sign interest rates are going to start to rise. Not today, or even for the rest of this year, but sooner was previously expected.

For what it is worth, Lowe said the latest data and forecasts did “not warrant an increase in interest rates in 2022”.

For now, sub-2% fixed-rate mortgages are a thing of the past. The last were withdrawn this week.

The decision means the booming housing market will start to crest. Low interest rates sparked the boom as renters flocked to become first-homebuyers and investors jumped in to catch rising prices.

The prospect of higher mortgage payments is going to dent this enthusiasm, perhaps quickly. Prices are set to stabilise, before edging, or sliding down .

We don’t yet know how quickly variable interest rates will start to rise, but given the Reserve Bank has walked away from a battle to defend yield curve control, we do know it’ll be a long time before it even considers doing it again.The Conversation

Isaac Gross, Lecturer in Economics, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Malcolm Stokes
November 06, 2021

Greed has fuelled the housing market making it near impossible for average 1st home buyers to own a valued social connection. A housing affordability correction is overdue.

November 17, 2021

So much more than interest rates at play. All the cash thrown around giving first homeowners ability to pay more (cash grants stamp duty concessions and the like) just adds fuel to the fire and pushes prices up further. If only government would stop taking dictation from property developers.

November 03, 2021

the RBA must defend heavily indebted borrowers who believed the RBA and decided to gear up heavy into a single asset class which by all historical and current measures and metrics whether they be in Australia or overseas was already very very very expensive.

RBA must defend the housing market. at all costs, or we will not survive the consequent fallout.

RBA DEfend!

Kien Choong
November 03, 2021

Thank you, that’s interesting. It may be the right thing to end “yield curve control”, but I’m sorry that the RBA walked back on its commitment to maintain it for 3 years. It’s going to be very difficult to make a similar long-term commitment in future. (Next time, don’t commit to something you can’t deliver on!)

Warren Bird
November 03, 2021

Kien, they DID deliver on their policy. They kept the yield curve flat (3 year government bond rates in line with overnight cash rates) for as long as they chose to do so. This helped to ensure that the banks cut their mortgage rates, variable and fixed, over the past year and a half.

Without management of the yield curve there was a risk that the banks would use higher longer term money market and bond rates as an excuse not to track the cash rate down with their mortgage rates. They wanted to make sure that didn't happen, so sent a very strong, clear signal to the markets.

That the RBA has now decided that economic fundamentals no longer warrant a flat yield curve is not failure of their policy, it's appropriate implementation of policy in light of changing circumstances.

November 06, 2021

Couldn’t agree more Warren. You are completely correct.

However, I’m sure many Australians who have now geared up based on the RBA’s statement that interest rates won’t go up until 2024 are now doing two things:

1. Their sums
2. Building their “case” against the RBA

Or maybe the media made that commitment and not Governor Lowe?

Warren Bird
November 06, 2021

Andrew, all the RBA has ever said was that they wouldn't increase the cash rate target until inflation was going to be in the 2-3% band. They said a few times, e.g. in December 2020 ( that they didn't expect that to have to be within 3 years. It was never a directive to borrowers to presume any future outcome. And I'd add, they haven't signalled anything moving the cash rate in the near term at this stage. Allowing the 3 year bond rate to go up is really just saying that now that it's 12 months on from when they thought they'd have 3 years, and the inflation outlook has unfolded as it has, that they think the cash rate might go up though not in a hurry. Read the final paragraph of last week's announcement and that is crystal clear ( ).

You're right - the media probably hasn't represented this accurately, particularly that part of the media that spruiks the property market all the time such as the nightly TV news!

So basically, I think that anyone who's geared up thinking that their variable loan rate would not go up until 2023-24 has taken a calculated gamble that the RBA's forecasts in 2020 would come about exactly. At this stage the RBA isn't saying they were wrong, but it was pretty poor risk management on their part not to factor in the possibility that their rates would start going up after 18 months or 2 years instead of 3! It was never a promise.

Richard Thomas
November 03, 2021

Rising rates were always going to be difficult for the housing market. The fact that such rises could be sooner than later, is now causing concern from borrowers.

Jeff K
November 06, 2021

Nah don’t worry RBA can’t raise interest rates.

The way it works is that when the RBA lower rates to support the economy and if that rate suppression blows asset price bubbles it’s not in their mandate to control. We don’t control house prices they said.

If however raising interest rates collapses the housing market it collapses the whole economy so they have to protect the housing market and the government has to support it so no matter what happens house prices always go up.

That’s why everyone is a property developer in Australia that’s our only industry and to keep it going we increase immigration..

Property is our passion, our love, our national pride and past time.

We are not smart like the Israelis.

We are not inventive like the Koreans.

We are not a draw card and awesome like America.

Property is our strength and getting heavy into borrowing money is our core strength joy and our salvation.

Don’t knock property! It’s the only thing we have.


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