It was one of several unconventional monetary policy tools used by the Reserve Bank of Australia during the depths of the COVID-19 pandemic, but a new review has indicated it is unlikely to be used again.
The three-year bond yield target was introduced at an emergency RBA board meeting in mid-March 2020, alongside a cut in the cash rate to a then-record low of 0.25 per cent.
Its aim was to keep market interest rates in line with the cash rate as much as possible by buying bonds in the open market when needed, and assist borrowers with low interest rates loans, such as three-year fixed rate mortgages.
“(The review) concludes that the yield target was successful in lowering funding costs and supporting credit provision,” RBA governor Philip Lowe told an American Chamber of Commerce in Australia event in Sydney.
Get Crikey FREE to your inbox every weekday morning with the Crikey Worm.
“In doing this, it helped the economy recover from the pandemic.”
The yield target was subsequently lowered to 0.1 per cent in November 2020 in line with a reduction in the cash rate.
“Following the introduction of the target, lending rates fell considerably, especially fixed rates,” Dr Lowe said.
“Indeed, banks lowered the interest rates for their three-year fixed-rate loans to be well below the new variable rate for the first time and the fixed-rate share of new housing lending rose to new highs.”
The target was discontinued in November 2021 as the economy showed a sustained recovery from the recession a year earlier.
But the review did find the policy ended in a disorderly fashion as market views changed about the economic outlook, causing some reputational damage to the central bank.
“With hindsight, it can be argued that there was too much focus on the downside risks to the economy and the need to insure against them, and too little focus on the possibility that things could work out better than expected,” Dr Lowe said.
“Earlier communication from the bank could have eased the situation, although the end of a target that was losing credibility was always likely to generate some volatility in market prices.”
The review found the probability of the board using a yield target again in future as low, but recognises that the use of a yield target might be appropriate in extreme circumstances.
The board is reviewing all of its suite of unconventional measures used during the pandemic.