Today, the Australian Central Bank doubled the size of its daily bond purchases to hold down the rise in long-term Australian interest rates. The market says Australian rates are too low and need to rise. The central bank disagrees, but if the market ends up having the correct view of the exchange rate, look for the Australian dollar to start depreciating. The FT has more on Australia’s decision:
Australia’s central bank doubled the size of its regular bond purchases on Monday in a move that analysts say will have broad implications as policymakers consider their response to a global jump in borrowing costs.
The decision by the Reserve Bank of Australia sent the country’s 10-year bond yield tumbling by almost 0.25 percentage points to 1.67 per cent, marking the sharpest rally in prices since the market turbulence last March. It had soared as high as 1.928 per cent as the country became one of the main focal points of last week’s worldwide bond sell-off.
The RBA’s purchases of A$4bn ($3.1bn) in long-term bonds was the second recent intervention after the bank on Friday launched an unscheduled purchase of A$3bn in short-term bonds.
“The actions of the RBA could influence market expectations of policies by other central banks if the back-up in yields is not consistent with economic fundamentals,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. “We believe that today’s decision could have implications across the globe.”
Government borrowing costs surged last week, with the 10-year US Treasury yield touching its highest level in a year at 1.6 per cent. The bond sell-off began as investors feared that the economic recovery from the pandemic, backed by substantial stimulus, would lead to rising inflation — which erodes the value of the interest payments on bonds.
The increase in yields has been seen as a test of central banks’ commitment to keep borrowing costs low until the economic recovery is well under way. Other central banks may come under pressure to follow the RBA, either through more forceful messaging or by boosting their asset purchases.
Read more here.