GBP AUD Still on the Front Foot with Rates

The GBP AUD exchange rate recovered early week losses to close slightly lower, but it may see further benefits from the interest rate hike last week. Analysts at ING said last week that they see another two hikes in March and May, before the bank stops there. That keeps the interest on UK investments at more attractive levels than Australia with the inflation picture down under seeing no immediate move by the RBA.

The GBP to AUD rate opens the week above the 1.9100 level which was resistance back in August.

Bank of England governor criticised for late show

The Bank of England Governor Andrew Bailey has been accused of failing to act quickly enough to ease the cost-of-living crisis threatening the country.

Gerard Lyons, a former adviser to the Prime Minister, said Bailey had a “complacent attitude” towards inflation.

Lyons added that Bailey had “misread” the economy and not communicated effectively with the markets. By failing to “nip inflation in the bud”, the Bank had not helped to ease the cost-of-living strain.

Speaking to The Mail on Sunday, Lyons said: “Throughout the last year their inflation forecasts have been poor and wrong. While the initial inflation shock was triggered by higher energy prices and supply shocks, the governor took a complacent attitude to the possible inflation risk.”

The previous BoE Chief Economist had warned of an “inflationary tiger” looming for the UK and left his role very soon after, possibly because his tone diverged from the bank’s dovish policy members.

ING analysts see a rate hike in March and May, which should take interest rates nearer to 1%.

Quantitative easing moves could come from RBA next

The market was focused on interest rate rises last week, but Reserve Bank governor Phil Lowe provided an important clue for his next move, according to AFR.

The bank is set to wind down its asset purchases program, but it delayed any decision on what the RBA will do with the A$350 billion in bonds that it purchased throughout the pandemic.

One option is to allow the bonds to mature, which would shrink the size of the Reserve Bank’s balance sheet. After the RBA board meeting on Tuesday, the bank’s governor said, “the board will consider the issue of the reinvestment of the proceeds of future bond maturities at its meeting in May”.

But he added further details in a speech to the National Press Club the next day, where he said that the reason the bank bought bonds was to counteract other central banks’

“If we hadn’t also done this, our bond yields and exchange rate would have been higher than they have been, and this would have impeded the recovery from the pandemic.”

But Lowe also hinted that the Reserve Bank could reduce some of the monetary support in May, if the Aussie economy continued to perform well.

“The large gaps in the maturity profile mean that we have more time to make a decision. The next maturity of an Australian government bond is in July 2022,” he said.

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