Daily Commentary BY THE CURVE TEAM –

RBA Holds the Line

3rd of March, 2021

The selloff in government bonds in the US and Australia recently made the RBA meeting particularly interesting yesterday.

No change in their current policy was announced. However, there was an indication that the bias is to extend the QE programme even further beyond the second round.

This is in light of the selloff in bonds which has driven yields up rapidly. It forced the RBA to bring forward some of its QE purchases ‘to assist with the smooth functioning of the market’.

The volatility in bond markets has widened spreads and reduced liquidity, which are frowned upon as they can induce market panic. Given this and recent developments, the RBA said in regard to their QE programme that they are ‘prepared to do more if necessary’.

This indication goes against market expectations. The 3-year government bond yield went up to 0.13% after the announcement and market pricing is suggesting an increase in the cash rate 12-24 months before the RBA’s expectation of 2024 at the earliest.

In data news, building approvals were down 19.4% for January following the lower grants for the HomeBuilder scheme kicking in. They remain 19% higher than last year but the drop was more drastic than expected.

Current account data for Q4 showed a surplus worth 2.9% of GDP. The trade surplus drove the gains, up 4.8% for the quarter.

Annually the current account surplus was 2.5% of GDP, which is the largest on record. The trade surplus was 3.7% of GDP for the year.

Josh Stewart

Associate - Money Markets