This is a very good op-ed by ANZ's Amy Auster on the RBA. Nothing really new in the content, which would be familiar to readers here. I have previously talked about the Stevens' put. She puts it differently:
The practical implication of all this is that rising overseas demand for government bonds will stabilise term yields in Australia and push them lower. The currency will be stronger than it otherwise would have been as central banks will be big and stable holders.
We can see this trend emerging. The commonwealth government bond yield curve has become very flat. The dollar is showing remarkable resilience, not only staying above parity with the US dollar during the past six months, but also reaching a historic high versus the euro. Australia’s real exchange rate (inflation-adjusted, trade-weighted) is higher now than at any time since the late 1970s, even though base metal prices have fallen in recent months.
The downside of this is that the RBA is likely to find it tougher to shift the yield curve, which sets the tone for short and long-term borrowing rates. And its ability to influence “monetary conditions”, including the impact of the exchange rate, has diminished considerably.
In an environment of soft inflation and tepid demand, stubbornly low term yields may not worry the RBA. But the dollar’s strength may become a point of vexation if demand weakens further. Should inflation rise in the months or years ahead, the RBA may find it has a “Greenspan conundrum” on its hands.
