GBP AUD After RBA Ditches Yield Control Program

GBP AUD After RBA Ditches Yield Control Program

The GBP AUD exchange rate surged higher by 0.70% on Tuesday after the latest Reserve Bank of Australia interest rate meeting. The RBA decided to abandon their defence of the 0.1% bond yield which led to an eye-watering bond market rally last week. Despite the obvious backtracking on inflation, the bank remained stubborn on interest rates.

The AUD GBP exchange rate is trading at the 1.8287 level after a strong Aussie dollar in recent weeks.

Reserve bank drops YCC, signals rate hike in 2023

As expected, the Reserve Bank of Australia dropped its yield-curve control of the April 2024 bond yield at 10 bp. The RBA failed to defend the bond price in the market last week and the yield soared. Governor Lowe did not fully capitulate on rates but was looking to limit the reputational damage after backtracking on inflation. He said the central bank remains patient on interest rates, and it is still plausible not to raise rates until 2024. However, he did say that rates could be lifted in 2023. The swaps market is now pricing in around 80 bp of tightening over the next 12 months, with a 10 bp hike in six months.

The Aussie dollar was hurt after the central bank did not display the hawkish pivot that many traders had anticipated. The RBA stressed that inflation was still too low for any action, however they omitted a previous projection that rates were unlikely to rise until 2024.

“Unlike other central banks (like the ECB recently), the RBA’s message was successful in at least marginally scaling down hawkish bets, although markets are still pricing in 76bp (basis points) of tightening in the next 12 months,” ING analysts said.

The New Zealand central bank acted recently to raise rates and there was speculation that the RBA may soon follow, with house prices showing frothy moves higher again this year.

Sunak ‘mindful’ of climate change costs

Rishi Sunak has reassured MPs that the Government is “mindful” of the economic cost of climate change, as he was asked about the tax increases “reaching net zero are going to entail”.

The DUP’s Sammy Wilson branded Cop26 a “climate circus” before warning the Chancellor of the “huge costs” of the Government’s net-zero strategy.

Mr Wilson said: “Given the commitments which the Prime Minister is making at the climate circus in Glasgow this week, how can the Chancellor possibly say that public finances will be managed effectively when the huge costs of net zero are not even published by the Treasury, let alone known by the public, and we are already seeing taxes increasing to pay for the huge infrastructure changes which reaching net zero are going to entail?”

Mr Sunak said: “I very much appreciate his concern about the cost of transitioning to net zero. What I’d say to him is the Government is also mindful of those costs.

Sunak’s big spending was criticised in the recent Autumn budget and Boris Johnson is splashing the cash at COP26 for largely purposes.

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