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RBA Faces Pressure to Intervene Again on Yields After CPI Surge

RBA Faces Pressure to Intervene Again on Yields After CPI Surge

The Reserve Bank of Australia’s game of chicken with the bond market is reaching new heights after Wednesday’s inflation surprise. 

The central bank faces enormous pressure to at least repeat last week’s unscheduled purchase of A$1 billion ($750 million) of April 2024 securities to keep the yield close to its 0.1% target for short-term bonds. Near-dated notes sold off after the consumer price index for the third quarter showed core inflation back above the bottom of the target range

The yield on the April 2024 note jumped to as high as 0.205%, the widest premium to the RBA goal since Governor Philip Lowe introduced a yield curve control program in March 2020. That’s wider than the 8-basis-point gap last Thursday, which prompted the RBA to make its first purchases since February. 

RBA Faces Pressure to Intervene Again on Yields After CPI Surge

The central bank is scheduled to buy A$1.6 billion of longer-term debt on Thursday, and could buy more. If it stays away, traders may try to front-run the RBA meeting next Tuesday, deeming the lack of intervention as a policy signal.

“The market will speculate the RBA plans to adjust or drop YCC unless the central bank buys the April 2024 bond again,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. “Even if they do come in tomorrow and buy a larger amount, the market still won’t believe they will stick to 2024 forward guidance.”

RBA Faces Pressure to Intervene Again on Yields After CPI Surge

Swaps traders are pricing in a series of hikes within a year to take the cash rate to 0.75%, from 0.1% now, based on OIS futures. Lowe has repeatedly said that the base case is for benchmarks to stay where they are until 2024. 

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