RBA Rate Bets Surge, Yield Target Tested on Global Price Worries

(Bloomberg) -- Traders are pricing in more aggressive interest rate increases by the Reserve Bank of Australia and are challenging its three-year yield target amid jitters over global inflation.

Markets are now implying the RBA will begin hiking in mid-2022, even after the central bank reiterated Tuesday that conditions for a rate rise “will not be met before 2024.” At the same time, the yield on the April 2024 security targeted by the RBA touched 17 basis points, compared with a goal of 0.1%. 

“There are a confluence of factors that will likely intensify in the coming months,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. She cited the following as reasons markets will doubt the RBA’s pledge to hold off raising rates:

• A shift in the global central banking stance that accelerated recently led by the Bank of England
• A more complex inflation picture with less transitory elements in key economies; and
• Increasing upside risk to activity in Australia’s eastern states as they emerge from protracted lockdowns

Policy makers worldwide are struggling to understand whether faster inflation is a temporary phenomenon linked to supply-chain disruptions or something more enduring. New Zealand consumer prices surged to almost 5% in the third quarter, compared with a central bank target in the middle of a 1-3% band, and the U.S. and U.K. are struggling with mounting wage pressures.

Australia is being caught up in this emerging inflation maelstrom despite much weaker price increases. The RBA is running record-low rates and a yield target to try to drive down unemployment and fuel faster wage growth. 

Australia reports consumer-price data next Wednesday and the risk is that it too posts an unexpected acceleration.

“While it was possible that underlying inflationary pressures in Australia could build more quickly than currently envisaged, the central forecast scenario was still that domestic inflation would pick up only gradually over the medium term,” the RBA said in minutes of its October meeting Tuesday.

©2021 Bloomberg L.P.