The Reserve Bank has conceded the messy retreat from its yield curve target policy hurt its reputation, but it said it was effective in supporting the economy.
As selling pressure increased, the central bank chose to stand out of the market, concluding the policy no longer had a purpose.The RBA conceded many financial market participants were burnt by its decision to drop the target, including those that expected it to be retained.
The RBA said there was also a financial cost involved in defending the target because the bonds it purchased fell in value as yields rose. But it said those costs were modest compared with the costs of its bond-purchasing program, and its term-funding facility policy.In future, the RBA said it would be more likely to opt for quantitative easing, which involves targeting a quantum of bonds rather than a price or yield.
The setting of a low, three-year borrowing rate “led to historically low fixed and variable lending rates for borrowers. In response, housing and business credit growth picked up to the fastest pace in over a decade”.These low borrowing costs worked by “freeing up cash flows to support households’ financial positions”.
The Fed study found that yield curve control mostly operated through a “super-narrow” channel where only specific Australian government bonds targeted in the RBA’s purchase operations were affected, but there were no spillovers elsewhere.“The RBA bought up the targeted bond, but achieved little else,” it said. In other words, the policy failed to achieve its main purpose: to ease financial conditions.
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