The GBP AUD exchange rate was sharply lower after the Reserve Bank raised rates higher than expected in their May meeting. The expectation was for a hike to 0.25%, but many thought they would wait until after the upcoming election before taking action.
The GBP to AUD touched the 1.17648 figure ahead of the RBA decision.
Australian central bank shocks markets with hawkish turn
Australia’s central bank shocked markets with a bigger-than-expected hike of interest rates in the middle of an election campaign.
Having abandoned patient rhetoric two months ago, Reserve Bank Governor Philip Lowe topped economists’ estimates by lifting the cash rate 25 basis points to 0.35%. That move, alongside suggestions of more hikes, sent three-year bond yields soaring through 3% for the first time in eight years.
Australia’s U-turn follows the global trend toward more aggressive action and is another sign that central banks follow the Federal Reserve, which is about to make its biggest rate increase in more than 20 years. Lowe’s shift is another blow to the country’s center-right government which is currently trailing in opinion polls.
“Global central banks are stepping up and they are front-loading rate hikes so why shouldn’t the RBA, particularly when their policy is extremely accommodative,” said Su-Lin Ong at Royal Bank of Canada.
“The RBA managed to wrongfoot every forecaster and even the market — no one was braced for 25 basis points,” said Sean Callow, a currency strategist at Westpac Banking Corp.
Most economists’ had expected a 15 basis-point hike, followed by further action after the election.
Labor election campaign will revel in the rate hike
The Australian election campaign now has an interest rate hike to focus on and Labor’s treasury spokesperson Jim Chalmers was the first to comment.
“We don’t judge Scott Morrison for not taking responsibility for all of it. We judge him for not taking any responsibility for any of it. There are places and ways that government can make a difference here including growing the economy without adding to these inflationary pressures, providing longer term cost of living relief and getting real wages moving again. He has got an excuse for everything, but a plan for nothing,” he said.
The CBA and ANZ banks were the first to increase their variable rate loans by 0.25%.
Gareth Aird, head of economics at Commonwealth Bank of Australia, was one of the economists who expected no change in rates, despite being the main forecaster at the country’s biggest lender.
But he said last week, an RBA rise today would “make it hard for us to take at face value what they say because their actions will be inconsistent with what they said”.
The bank’s governor had previously said that he wanted to see inflation and wage growth at the same time. But these economists are ignoring that inflation has surged beyond expectations and would eat into any potential wage growth in the country.
The RBA has now predicted underlying inflation of ‘around’ 4.75% in 2022 after a previous forecast of 2.75% back in February.