Economists welcomed the Reserve Bank’s mea culpa about its controversial yield curve control which ended in chaos and damaged the central bank’s credibility.
Bob Cunneen, chief economist at MLC Asset Management, said it is healthy for a central bank to concede mistakes and that it would “strengthen its scenario analysis”. But he remained critical of the central bank for allowing some housing borrowers to stretch their finances and take on more debt due to artificially low fixed interest rates.
“When these fixed rates mature in the next two years, there will be a damaging crunch for these borrowers and that’s only when we realise how major a mistake the RBA yield target was,” he said.
Tony Morriss, head of Australian economics and rates strategy at Bank of America, said he still found it difficult to reconcile that the central bank did not fully consider the strategy exit for the yield curve. He remained puzzled as to why the central bank did not communicate with the market when it decided to step back from defending the target.
RBC Capital Markets economist Su-Lin Ong argued whether the yield curve control was worth it over the entire programme. “It was perhaps helpful at first, definitely not later and the ‘reputational damage’ also likely rules out it being credible if adopted again,” she said. “It is clear that quantitative easing is a more and preferred tool which will be effective again if needed.”
The Reserve Bank introduced the yield curve control at the start of the COVID-19 pandemic when financial markets panicked and the bond market froze. It was a pledge to keep rates at a record low 0.1 per cent until 2024 by pinning the three-year government bond rate at the same level, giving comfort to borrowers that interest rates would remain low.
But late last year, bond markets revolted, sending the April 2024 bond yield to 0.8 per cent amid evidence rising inflation would force the central bank to raise interest rates much sooner than it promised.