MNI BRIEF: High-frequency Yield Data of Little Use - RBA Paper

Reserve Bank of Australia (RBA) researchers believe the use of high-frequency yield data has limitations when measuring the impact of monetary policy and its communication.

RBA researchers Jonathan Hambur and Qazi Haque from the University of Adelaide published Friday a review that used yield data on interest rates of different maturities to quantify the effect of different Reserve communications on the market’s cash-rate expectations. “The results also confirm our existing understanding of the effects of policy on the economy,” they found. “Increases in the current policy rate weaken economic activity, but changes in people’s expectations for policy, or regarding risk and uncertainty, don’t appear to have an affect [at least that we can find using this approach].”

The researchers noted financial markets appear to systematically misunderstand how the RBA will respond to data, highlighting the importance of clear communication. “COVID-19-era unconventional monetary policy worked mainly by affecting the premia people require to take on risk, rather than expectations for future policy rates. This is in contrast to pre-COVID-19 policy,” the researchers noted.

The RBA shocked markets with a 25bp hike to 3.85% last week, taking many market economists by surprise (see: MNI RBA WATCH: Shifts Hawkish, Targets Services).