RBA loses control of bond market panic merchants

Yesterday’s Aussie bond action was borderline hysterical as the belly of the course threatens to jackknife into inversion with the long and the RBA’s yield curve control has been obliterated:

The US curve was also crushed though its long-end was bid impressively:

Spreads to the US blew out at the longer end putting upwards pressure on the AUD:

Terry McCrann is typical of the panic today:

This is what I wrote almost a month back on October 4.

“Inflation is coming, ready or not. Indeed, it’s already here if somewhat muted for the moment by the lockdowns in NSW and Victoria.”

The RBA will do exactly the same things it did last month.

It will leave its official interest rate at the all-but zero 0.1 per cent.

It will continue to target the early 2024 bond yield at the same 0.1 per cent.

And it will keep buying $4bn of government bonds a week.

It is what Governor Lowe says that will be, that now has to be, very different.

Bluntly, the time I have certainly been waiting for has arrived: when he has to ‘moderate’ his ‘promise’ not to raise that official rate until early 2024 at the earliest.

He certainly has to say some-thing; on the Friday after the meeting the RBA releases its latest detailed analysis of the economy – and, most pointedly, its forecasts.

To put it politely, its current inflation forecasts, from early August, have been blown out of the water by the 0.8 per cent September quarter headline inflation number and the almost as high 0.7 per cent underlying inflation measure.

In August the RBA forecast 2.5 per cent headline inflation for the December year and 1.75 per cent underlying.

Well, the headline rate for the first nine months has already added up to 2.2 per cent. It will blow through 3 percent for the year.

The underlying rate has already added to 1.6 per cent for the nine months and will clearly go past 2 per cent – maybe even, significantly past, 2 per cent – for the December year.

Self-evidently there is no way the RBA could release higher – now, realistic – inflation forecasts on the Friday, and maintain its “no inflation and no rate rises until 2024 to see here” rhetoric on Cup Day.

Of course they can. Macro and monetary policy is about looking forward not backwards. The base case is that Australia’s terms of trade have begun one of the greatest crashes in their history over the next six months. This will deliver a deflation shock the likes of which we only usually experience during global recessions. It will include both raw materials and processed metals and the end result for Australia is predictable:

  • national income will crater;
  • nominal growth will crater;
  • the federal budget deficit will crater;
  • wages will stall, and…
  • inflation will disappear like rain on the mountainside.

Add to this reopening borders and a wave of cheap foreign labour no matter who is in power.

The RBA should tighten macroprudential quickly to avoid that option being washed away by the coming deflation tsunami.


Update: No RBA buying of its protected yield curve control today so some acknowledgement that it has lost to the loons. Yields blowing out accordingly.

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