The Reserve Bank of Australia met on February the 02 and delivered a surprise to the markets. They kept the interest rate and the 3yr bond yield target unchanged at 0.10%. This was as expected. The RBA also noted that the recent economic recovery had been based on significant fiscal and monetary support. The RBA said they will not increase interest rates until actual inflation is above the 2-3% target range. This means that interest rates are expected to stay as they are until 2024. So far, no surprises.

The surprise

The change to the policy was the extension of the RBA’s bond purchase programme. Bond purchases were extended past April and by the amount of $AUD100 billion. The bonds are to be bought at the current pace from then of $AUD5 billion a week, This was slightly unexpected as some desks were expecting the possibility of QE coming to an end in April on the back of stronger labour data. In fact reading the RBA’s statement it was generally quite upbeat, despite the dovish twist in their policy action. Remember that QE purchases weaken a currency, so the AUD was weaker out of the meeting. You can read the whole statement here from the RBA.

This decision put immediate pressure on the AUDNZD pair and has opened up a further drop in the AU10Y and NZ10Y bond yield spread. The divergence between the two means that the latest RBA decision keeps an AUDNZD sell bias in place unless NZD data/central bank decision alters the outlook for the NZ10Y. The latest NZD employment date has led to ANZ expecting the RBNZ to keep interest rates unchanged at 0.25%. This should means AUDNZD rallies higher find sellers.