MNI BRIEF: RBA Narrows Rate Hike Views As Prices Show Strength

The Reserve Bank of Australia on Tuesday abandoned its yield target on government bonds and also its guidance on an interest rate rise, dropping language of no hike until 2024.

The RBA board as expected, kept official interest rates on hold at the record low of 0.10%, but still made significant announcements in response to higher than expected inflation data last week, when underlying inflation reported at 2.1%, see: MNI STATE OF PLAY: Inflation Tests RBA Dovishness On Rates.

The central bank has consistently said that it could not see conditions for a rate rise until 2024, but changed its language today, saying that underlying inflation would be "no higher than 2.5% at the end of 2023." The RBA's target range for inflation is between 2% and 3%. There was no mention, for the first time in almost a year, that the bank expected the next rate rise to be in 2024.

The other significant announcement was the abandonment of the 0.10% yield target on government bonds maturing in April 2024, which came after the bank did not defend the target on markets last week. The RBA said the decision reflected the improvement in the economy and the "earlier than expected progress towards the inflation target."

"Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished," the RBA statement said.