The RBA gave in to market pressure, abandoning a bond-yield objective after higher borrowing rates were priced in by traders due to an increase in inflation.
Following a bond market selloff last week, the decision to remove the 0.1% yield goal on the April 2024 security comes amid a stronger domestic outlook bolstered by high vaccination rates. As expected, the RBA retained its cash rate at a record low of 0.1%.
"Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment," Governor Philip Lowe said, "the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished."
The currency was on course for its largest one-day drop since September, with Lowe stating that inflation would "likely take some time" to return to its target.
Australia is also involved in the global inflation debate, with bond markets pressuring policymakers around the world to act quickly to combat rising price pressures. For the first time in six years, Australia's core consumer prices soared back inside the RBA's 2-3% target, sending yields soaring.
In a statement, the RBA said the central forecast is for GDP growth of 3% in 2021, and 5.5% and 2.5% in the following two years. The central forecast is for the unemployment rate to fall over the next few years, reaching 4.25% at the end of 2022 and 4% at the end of 2023.
The RBA said the board is prepared to be patient, with the central forecast calling for underlying inflation of no more than 2.5% by the end of 2023 and only a gradual increase in wage growth. Adding that the decision to abandon the yield target reflects the economy's improvement and the faster-than-expected progress toward the inflation target.