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Review Of The Yield Target

RBA
The key points from the Bank's review of its yield target were as follows:
  • Together with other monetary policy measures, the target was successful in achieving its objectives of lowering funding costs and supporting the provision of credit to the economy. It was an important element in the Bank's package of policy measures that provided insurance against very bad economic outcomes, at a time when the already low level of interest rates limited the scope for lowering the cash rate.
  • The time-based forward guidance implicit in the yield target helped to ease financial conditions in the extraordinary days of the pandemic, but carried risks in the highly uncertain economic environment. As the distribution of possible economic outcomes shifted with the economic recovery, the yield target was not well suited to respond.
  • In its decision-making, the Board paid close attention to the downside risks to employment and inflation. It was focused on providing insurance against very bad outcomes, on the basis that if the downside prevailed there was limited scope for further policy measures, but that if the upside prevailed, policy could be adjusted. In retrospect, a greater focus on the upside could have led to a decision not to extend the target from the April 2023 bond to the April 2024 bond (in September 2020) and/or earlier removal of the target, when market yields were at or even below the target.
  • As part of its review of this experience, the Board has agreed to strengthen the way it considers the full range of scenarios when making policy decisions, especially where they involve unconventional policy measures. This scenario analysis will include the flexibility of the policy to respond to changing circumstances and the associated operational and communication challenges.
  • The target was met for the bulk of the period, but the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market. This experience caused some reputational damage to the Bank.
  • For much of the time the target was in operation, it successfully reinforced the Bank's forward guidance about the cash rate, but its effectiveness as a monetary policy tool waned as market participants reassessed their views of the outlook for the cash rate. In the later part of the targeting period, the transmission of the target to other interest rates in the economy weakened, with market rates of similar maturity moving materially away from the target government bond rate.
  • If circumstances warranted considering the use of unconventional monetary policies in the future, any use of a yield target would require close attention to the lessons learned from this experience, and a careful assessment of the costs and benefits of alternative tools. While a bond purchase program offers more flexibility than a yield target, it carries other risks, including larger financial risks to the central bank and the greater possibility of market dysfunction as bond holdings increase. As part of its ongoing process of review, the Bank will undertake a review of its bond purchase program later in 2022.
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The key points from the Bank's review of its yield target were as follows:
  • Together with other monetary policy measures, the target was successful in achieving its objectives of lowering funding costs and supporting the provision of credit to the economy. It was an important element in the Bank's package of policy measures that provided insurance against very bad economic outcomes, at a time when the already low level of interest rates limited the scope for lowering the cash rate.
  • The time-based forward guidance implicit in the yield target helped to ease financial conditions in the extraordinary days of the pandemic, but carried risks in the highly uncertain economic environment. As the distribution of possible economic outcomes shifted with the economic recovery, the yield target was not well suited to respond.
  • In its decision-making, the Board paid close attention to the downside risks to employment and inflation. It was focused on providing insurance against very bad outcomes, on the basis that if the downside prevailed there was limited scope for further policy measures, but that if the upside prevailed, policy could be adjusted. In retrospect, a greater focus on the upside could have led to a decision not to extend the target from the April 2023 bond to the April 2024 bond (in September 2020) and/or earlier removal of the target, when market yields were at or even below the target.
  • As part of its review of this experience, the Board has agreed to strengthen the way it considers the full range of scenarios when making policy decisions, especially where they involve unconventional policy measures. This scenario analysis will include the flexibility of the policy to respond to changing circumstances and the associated operational and communication challenges.
  • The target was met for the bulk of the period, but the exit in late 2021 was disorderly and associated with bond market volatility and some dislocation in the market. This experience caused some reputational damage to the Bank.
  • For much of the time the target was in operation, it successfully reinforced the Bank's forward guidance about the cash rate, but its effectiveness as a monetary policy tool waned as market participants reassessed their views of the outlook for the cash rate. In the later part of the targeting period, the transmission of the target to other interest rates in the economy weakened, with market rates of similar maturity moving materially away from the target government bond rate.
  • If circumstances warranted considering the use of unconventional monetary policies in the future, any use of a yield target would require close attention to the lessons learned from this experience, and a careful assessment of the costs and benefits of alternative tools. While a bond purchase program offers more flexibility than a yield target, it carries other risks, including larger financial risks to the central bank and the greater possibility of market dysfunction as bond holdings increase. As part of its ongoing process of review, the Bank will undertake a review of its bond purchase program later in 2022.