Macroscope | Despite Australia’s bond market chaos, central banks should hold their nerve
- Markets, concerned about the risk of a hawkish policy mistake, are goading central banks into raising rates aggressively, making the risk of a policy error more likely
- Real yields are in negative territory, signalling a bearish outlook for growth. This is not the time to raise rates
Just because some of the risks and vulnerabilities in financial markets are well flagged does not mean they cannot wreak havoc once they materialise.
Leading central banks’ determination to avoid communication blunders, and their insistence that the recent build-up in inflationary pressures is transient, had until recently allayed concerns that another tantrum was in the offing.
Yet, over the past month, bond investors’ confidence in the transitory inflation narrative has crumbled, partly because central banks themselves have begun to tilt in a more hawkish direction as price pressures have proved more persistent than anticipated.
Nowhere is the challenge to the credibility of monetary policy more acute than in Australia, whose central bank has remained resolutely dovish despite the rise in inflation.