* RBA holds cash value and 3-year yield target at 0.1%
* Said committed to yield target, to buy more bonds if needed (Add comments from CBA economists at pars 7,8, 11)
SYDNEY, March 2 (Reuters) – Australia’s central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers struggle to stop a surge in bond yields that is hurting the country’s very strong economic recovery.
Closing its March board meeting, the Reserve Bank of Australia (RBA) keeps interest rates at 0.1% and is committed to maintaining “very supportive monetary conditions” until jobs and inflation goals are met.
The global bond market has been heavily sold off in recent days on speculation massive monetary stimulus will end soon as the economy emerges from recession triggered by the pandemic.
On Tuesday, Governor Philip Lowe said he does not expect to meet the RBA’s inflation and employment goals through 2024, signaling interest rates will remain at 0.1% for an extended period.
Despite that commitment, Australian bonds were sold on the 10-year futures which implied a yield of 1.72% compared to 1.66% on Monday.
The local dollar, which has been trading near a three-year high, pared some of its losses and was at $ 0.7762, up from a low of $ 0.7737 the previous day.
Economists at the Commonwealth Bank of Australia (CBA) expect the RBA to abandon its three-year yield curve control (YCC) target in the second half of this year while maintaining its flexibility to buy bonds at the end of a longer curve.
“We continue to believe that the ongoing improvement in domestic economic data will eventually force the RBA to do something about the YCC later this year,” said CBA economist Gareth Aird.
So far, Australia’s success in containing the coronavirus has allowed consumer spending to bounce back from a lockdown-fueled recession.
Figures released on Wednesday are expected to show gross domestic product (GDP) grew 2.5% in the December quarter, on top of the 3.3% jump in the previous quarter.
“More specifically, we think the RBA will exit YCC in the second half of 2021,” added Aird.
MORE THAN THAT?
Economists generally expect the RBA to extend its quantitative easing program targeting longer-term bonds of A $ 100 billion to help achieve its goals.
On Tuesday, Lowe reiterated the RBA’s commitment to a three-year yield target of 0.1% while adding that they will buy more bonds as needed to support that target.
The remarks follow last week’s global bond market defeat which saw Australian yields soar to two-year peaks in just a few sessions with three-year yields hitting 0.188%.
The bank responded with an aggressive A $ 3 billion ($ 2.33 billion) bond purchase offer last Friday, followed by another A $ 4 billion on Monday.
“The market is on notice,” said ANZ economists, underlining the RBA’s readiness to buy more bonds if needed.
“The bigger problem for the bond market is the continuation of the much better than expected data. It supports a continuous steep curve. “
Across the Tasman Sea, New Zealand’s central bank also stressed on Tuesday that it was in no rush to tighten policy, trying to quell market speculation about an early halt to stimulus.
$ 1 = 1.2875 Australian dollars Report by Wayne Cole; Edited by Sam Holmes