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RBA’s Lowe is pushing back against the market and slashing returns

(Bloomberg) – Reserve Bank of Australia chief Philip Lowe pushed against pricing in bond markets on an earlier tightening of monetary policy, lowering currency and yields as he reiterated interest rates are unlikely to rise until at least 2024 In the past few weeks, market pricing has already implied the expectation of a possible increase in the cash rate at the end of next year and then again in 2023, ”said Lowe in a speech at the Australian Financial Review Business Summit in Sydney on Wednesday. “This is not an expectation we share.” The benchmark yield on three-year bonds fell 0.087% as it briefly fell below the RBA’s 0.1% target for the first time this year. It calmed down to meet target as investors began to recalibrate expectations for the interest rate outlook. What Bloomberg Economics Says … “Governor Lowe’s speech made it clear that Australian interest rates will be lower for longer. The RBA will not be affected by transient, temporary fluctuations in inflation as Lowe signals a focus on the labor market and, in particular, on wage-driven inflation as the future anchor for Australian monetary policy. – James McIntyre, The Central Bank of Economist Australia has been stepping up bond purchases over the past few weeks, including an unscheduled operation, as it battled rising yields triggered by a reflation trade that hit global markets. The RBA defended its target return of 0.10% – including the level of the key interest rate – and tried to calm the markets. Lowe said today that even the improved inflation expectations priced in by the markets are not particularly high and are not above the central bank’s targets. The governor reiterated the development of the RBA’s inflation target regime, which now requires actual – unpredicted – ones. – Inflation must be within the 2-3% target before moving interest rates are taken into account. That will likely require over 3% wage growth, Lowe said, noting it is currently hitting a record low of 1.4%. “There is a long way to go back to wage increases that are consistent with the inflation target,” he said. Martin Whetton, head of Lowe’s fixed income and foreign exchange strategy at the Commonwealth Bank of Australia, said he had delivered a “spirited defense of their attitudes” and agreed with Lowe that the conditions for a rate hike would not be met for some time boss Damien McColough said the message was clear that the market “is ahead of the curve in terms of increasing policy expectations”. Leveraged and macro funds sold the Aussie after it failed to rebound above its New York closing price, FX traders, according to Asia on Lowe’s comments. It traded 0.4% lower at 76.82 US cents at 1:33 pm in Sydney. The 10-year yield fell six basis points to 1.72%, also due to the fact that US Treasury bond yields shifted overnight. The Australian economy has rebounded in a V-shape when authorities managed to get Covid-19 under control and unemployment has fallen accordingly: to 6.4% in January from a pandemic peak of 7.5%. There is still much to be done, however. Remaining low “Over the past decade, estimates of the unemployment rate related to full employment have been lowered repeatedly,” he said. Based on recent experience, “it is certainly possible that Australia can achieve and maintain an unemployment rate in the low four years, though only time will tell.” The governor confirmed the bank’s commitment to its three-year return target, saying it do not consider deleting it. On the question of whether to keep April 2024 as a three-year target bond or postpone it to November 2024, he said, “The board has not yet made a decision on this issue and will repeat it later in the year Check has more information on the economic recovery and the job market. Westpac’s McColough said there is now a greater chance that control of the yield curve will be postponed from April 2024 to November 2024. Later in the year, the bank will also consider extending the quantitative easing program, the governor said. The RBA announced a six-month program of A $ 100 billion ($ 77 billion) in longer-term securities in November and announced an additional A $ 100 billion in February when the first tranche expires in mid-April. A key goal of the QE program has been to keep an eye on the Australian currency, which had risen around 40% since March last year before weakening again in recent days due to a stronger US dollar. When asked about the exchange rate, the governor repeated his latest mantra: “I would be even more comfortable if it were even lower,” said Lowe. “Still, I can’t say the currency is overvalued,” citing the strength of commodity prices. “In order for me to understand why the currency is where it is, I want it to be lower.” In response to criticism of the central bank’s policies by academic economists and others arguing it should do more QE, Lowe pointed out that between the A total of $ 200 billion in bond purchases and $ 200 billion for a bank loan program provided great impetus. “We’re already doing a lot,” he said, noting that this happened at a time when the economy was moving better than expected. “So we are in watch-and-wait mode. When it turns out we have to do more than we can. “In his speech, referring to boosting house prices, the governor said that there are mechanisms to limit lending that do not require stricter policies. He said the RBA pays close attention to lending standards but does not target house prices, “nor would it make sense to do so.” (Updates with comment from Bloomberg Economics in paragraph four.) For more articles like this, please visit us at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP