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Australia’s disorderly exit exposes the flaws of yield curve control

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The Reserve Bank of Australia’s chaotic exit from yield curve control last week, after markets crashed through its cap on three-year bond yields, illustrates the growing pressure on central banks to tighten monetary policy as the world economy recovers from the pandemic.

But it has also exposed a serious problem with the whole policy of yield curve control: unlike asset purchases, which can easily be tapered when the economy improves, it is very difficult to make a smooth exit from a cap on bond yields.

That means the episode has important lessons for other central banks, such as the Bank of Japan, which either use yield curve control or have considered the policy.

“Putting all the experience together it’s quite unlikely that we will have a yield target again,” said RBA governor Philip Lowe. “And it is not just because of the experience of last week.”

Under yield curve control, the RBA promised last year to buy as many three-year bonds…

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