(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

 

LONDON - Investors are receiving an Antipodean lesson in the perils of taking central bankers at their word. The Reserve Bank of Australia has for several trading days declined to defend a yield level that it had said it was targeting. It’s not just investors who will suffer the consequences.

The yield on an Australian government bond that matures in April 2024 started trading last week around 0.1%, the level the central bank is targeting. By Friday it had surpassed 0.8% after the RBA passed up several opportunities to stop the yield from rising, hurting those investors who had believed in its guidance. The central bank’s actions suggest that it will ditch this policy at a meeting on Tuesday. But if so, the tactics look particularly clumsy given it only had to respect the target for an extra week before formally announcing the change.

It’s not the first time monetary policymakers have given investors whiplash. The Swiss National Bank triggered spectacular currency market gyrations in 2015 when it unexpectedly abandoned its three-year cap on the franc’s value against the euro. And former Bank of England boss Mark Carney acquired the “unreliable boyfriend” soubriquet when he didn’t follow through on guidance that made a link between unemployment and policy rates. Asset price volatility usually increases when investors think central bankers won’t do what they say.

Developed-world central banks have a large stock of credibility, but they need it now more than ever. First, a long period of low policy rates has made rate-setters increasingly reliant on rhetoric to guide asset prices and keep borrowing costs in check. Second, the outlook for inflation is particularly murky at the moment. Federal Reserve Chair Jerome Powell, European Central Bank President Christine Lagarde and peers expect high inflation to abate and are counting on workers to believe them to prevent wages from chasing consumer prices higher in a self-feeding spiral.

The loss of faith may not be confined to Down Under. Lagarde tried and failed last week to convince financial markets that her central bank won’t raise rates next year. The risk is that she and others will find it harder to keep markets in thrall if their peers are so cavalier about sticking to their word.

 

CONTEXT NEWS

- Australia’s central bank has for several trading days declined to defend its 0.1% yield target for the April 2024 government bond. The yield on that bond rose above 0.8% on Oct. 29 and surpassed that level again on Nov. 1.

- The Reserve Bank of Australia holds a monetary policy meeting on Nov. 2.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Neil Unmack and Oliver Taslic) ((For previous columns by the author, Reuters customers can click on PATTANAIK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe | swaha.pattanaik@thomsonreuters.com; Reuters Messaging: swaha.pattanaik.thomsonreuters.com@reuters.net))