The GBP AUD exchange rate was higher by 0.20% on Tuesday after the Australian Reserve Bank surprised markets with a larger rate hike. The pound sterling is gaining ground as the hikes are already putting the brakes on the Aussie consumer. Boris Johnson’s successful confidence vote also removes uncertainty for the pound in the near-term.
The GBP to AUD rate was trading at the 1.7440 with a third day of gains for sterling.
RBA surprises with interest rate hike of 0.50%, home owners could suffer
The Reserve Bank of Australia (RBA) has surprised markets with a larger than forecast interest rate hike of 50bp. The first consecutive raise for 12 years takes the cash rate to 0.85%. and that will be passed on immediately by the big banks.
The bank’s governor Philip Lowe said:
“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead. The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market”.
ING analysts said of the rate outlook:
“The RBA has maybe bought itself a bit of time with this larger-than-expected hike. As it meets more frequently than the US Fed, it doesn’t need to keep up this pace of tightening at each meeting to remain more or less in step with the Fed. So we may see a reversion to 25bp at the next meeting. However, there is still a long way to go. Many analysts reckon Australia’s neutral interest rates lie somewhere around 3.5%.”
This could spell doom for many homeowners as Aussie borrowers on variable rates are forecast to be paying an extra $443 a month on home loans by Christmas. That would be based on the central banks anticipated cash rate of 1.75 per cent by the end of 2022 and to 2.5 per cent by the end of 2023. The situation could spiral out of control if ING are right about 3.5% and government would have another crisis on its hands.
Consumers already hit, Boris gets back to work
Consumer confidence in Australia was also lower just ahead of the RBA meeting and will get worse. Alongside an uncertain outlook for the Chinese economy, the Aussie dollar is suffering.
The ANZ and Roy-Morgan’s weekly survey finds sentiment has dropped by a further 4% to its lowest level in 22 months.
David Plank, head of Australian economics at ANZ, said the confidence drop was “most likely on cost-of-living concerns as inflation expectations rose to 5.7%.
“Consumers are especially pessimistic about the current economic outlook and their current financial circumstances,” he said.
In the UK, Boris Johnson gets back to work after surviving his confidence vote, telling his party to “draw a line” under the recent events.
That may be possible in his cabinet, but the pressure still mounts with many seeing it as a matter of time before he is forced to leave.
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