Lower for longer? RBA dismisses rising bond yields

The Reserve Bank of Australia (RBA) has come out today and told investors that it has no plans to raise interest rates anytime soon

A hand moves a building block from green arrow to red, indicating negative interest rates

Image source: Getty Images

Rising bond yields have been the talk of the ASX town over the past few weeks. Government bond yields have spent most of 2021 rising from the historical lows that we saw last year. That has triggered some incredible share market volatility, particularly in the ASX tech space. Yesterday, we discussed how ASX tech shares were on the brink of a bear market, given the S&P/ASX All Technology Index (ASX: XTX) was approaching a 20% difference between its most recent high and its current level.

Well, today, those fears have been somewhat allayed. The All Technology Index is today up an impressive 3.65% at the time of writing.

ASX tech investors probably have the RBA to thank.

According to reporting in the Australian Financial Review (AFR) this morning, RBA governor Dr Philip Lowehas come out and told investors that wages growth would need to be “materially higher” for the Bank even to consider raising interest rates. The RBA has previously indicated that the record low cash rate of 0.1% would remain until 2024.

However, the bond market had other ideas.

Inflation first, rate hikes second for RBA

The AFR tells us that Dr Lowe noted that the bond market has been pricing in an interest rate hike as early as next year and another in 2023. He went on to say that “this was not an expectation that we share”. For this to come to pass, Dr Lowe stated that inflation would need to be sustainable above 2-3%, and wages growth would need to be “sustainably” above 3%. It doesn’t;t sound like he thinks this will happen soon:

The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time. Predicting how long it will take is inherently difficult, so there is room for different views. But our judgment is that we are unlikely to see wages growth consistent with the inflation target before 2024.

According to Dr Lowe, wages growth is currently running at around 1.4% (the lowest on record) and was low even before the coronavirus pandemic’s onset.

The 10-year Australian government bond yield has been falling a little this week but has yet to show that it has taken Dr Lowe’s comments to heart. On Sunday, it was sitting at roughly 1.83% but is currently (at the time of writing) at 1.78%.

For the RBA governor to provide such specific commentary of market bond pricing and yields is rather rare. It could indicate that the RBA is starting to consider rising bond yields a risk to the Australian economy by pushing up our exchange rate.

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