What a historic spanking. For a few months now Aussie inflation hawks have been testing the RBA’s commitment to yield curve control. Last week they forced it to buy more bonds. Yesterday, markets applied the blow torch to short-end bond yields, following Wednesday’s three-month-old inflation number, and the RBA folded like a crack whore needing a fix.
YCC is the RBA’s commitment to the market keeping the cash rate anchored at 0.1% until April 2024. It is this above all else that enables the current swathe of two-year fixed-rate mortgages under 2% in the property market. Yesterday the YCC collapsed to a two-year yield of 0.5% and a three-year yield of 1.15%.
In other words, those two-year mortgage deals under 2% are about to rocket to 2.5%, and 3% for a three-year duration.
What possessed the RBA to do this?
For several years it has maintained a new and steadfast commitment to low rates boosting inflation. To enforce this, it shifted its reaction function to sustained inflation within its target band. Yet here we are with one-quarter of core inflation above 2%, one quarter in six years mind you, and it collapses like a pole dancer in the market’s lap.
What kind of mincing monetary policy is this? A few supply-side inflation ticks and you throw your brassiere at the first inflationista that comes along?
There is a big price to be paid for this cavorting, weak-kneed effort.
Firstly, the RBA is now the market’s beearch. The next time the RBA needs to crush spreads or keep them low during a panic, crisis or secular deflation why would the market listen? It’ll recall that easy sweetie that teased with its QE but couldn’t wait to rip its clothes off the moment the going stiffened.
Secondly, how angry should households be? The RBA has lured everybody into a 2% fixed-rate mortgage frenzy on the promise it will last until 2024. That now shapes, according to bond markets, as a riotous interest rate reset shock of six rate hikes before then.
That’ll mean the interest rate on fixed mortgage rates offered today will nearly double when they roll off in two and three years!
Don’t fret too much. I still think that the market itself will end up repricing lower yields before too long. The global inflation crash of 2022 should take care of it. To wit, on the same day that the RBA was whoring for the market, commodity prices in China were again limit down, presaging an epic deflationary bust in the pipeline.
But what a joke is the posing RBA; dancing a jig in its best frills and panties for the first coked-up banker that comes along!
Is that in its charter?
