Under the policy,the RBA explicitly targeted a 0.1 per cent yield on three-year government bonds due to mature in April 2024. Alongside other “unconventional” policies,the target helped to drive down the cost of borrowing across the economy,including on fixed-rate home loans.
By late last year,however,the target lost credibility in the financial markets as bond investors bet inflation would force the RBA to raise interest rates earlier than expected. Yields blew out to far higher than the 0.1 per cent target,hitting a peak of 0.78 per cent.
In response to the surge in yields,the RBA ditched the target in November last year,arguing it did so because the economy was rebounding much more firmly than they expected.
Some have argued the episode dented the RBA’s credibility,and the central bank on Tuesday said this was an “open question,” arguing other central banks had also underestimated the strength of the economic recovery.
In a review of the program,the RBA said the policy had succeeded in driving down funding costs across the economy,pointing to the fall in fixed rates,and a jump in housing and business lending.
However,it conceded the exit from the program late last year had tarnished the RBA’s reputation and caused dislocation in the bond market.
“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,” the RBA said.