Australia's central bank opens door to earlier rate rise, but pledges patience

Sydney

AUSTRALIA'S central bank took a major step on Tuesday (Nov 2) towards unwinding extraordinary pandemic stimulus policies by abandoning an ultra-low target for bond yields and opening the door for an earlier hike in cash rates.

Yet Reserve Bank of Australia (RBA) Governor Philip Lowe also pledged to be patient with policy and again rejected market talk that a hike could come as early as May next year.

"The market can believe this guidance, or not - take it, or leave it," said Paul Bloxham, a chief Australian economist at HSBC. "If financial conditions are tighter than the RBA would like as a consequence, they can ramp up the 'jawboning'."

Concluding its monthly policy meeting, the RBA kept the cash rate at a record low of 0.1 per cent but dropped that target for the April 2024 government bond.

It also omitted a long-held projection that rates were unlikely to rise until 2024, saying a move in 2023 was now possible given inflation had moved back into its 2-3 per cent target band two years earlier than forecasted.

The RBA would, however, continue to buy government bonds at a pace of A$4 billion (S$4 billion) a week and emphasised that inflation was only expected to be at the middle of its target band by late 2023.

"The latest data and forecasts do not warrant an increase in the cash rate in 2022," said Lowe, taking issue with market pricing. "The Board is prepared to be patient."

The bank last week gave up any pretence of defending the bond target as yields flew to 0.73 per cent and the market suffered one of its worst monthly drubbings in decades.

Investors are still wagering the central bank is behind the curve as futures are almost fully priced for a rise to 0.25 per cent by May 2022, and for 1 per cent by the end of the year. REUTERS