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  • Writer's pictureChris Broadfoot

Central Banks take Centre Stage this week.

This week has been pivotal for global financial markets, with significant interest rate decisions from central banks in Australia, Switzerland, and the United Kingdom. Each bank's stance reflects its ongoing strategies to manage inflation and economic growth amid varying domestic and international pressures.

On Tuesday. the Reserve Bank of Australia (RBA) decided to maintain the cash rate at 4.35%, highlighting a cautious approach in their battle against inflation. This decision reflects a finely balanced debate within the RBA, considering both the need to curb inflation and the potential economic slowdown.

Key Points:

  • Rate Decision: The RBA was in two minds about whether to raise interest rates. Ultimately, they decided to keep the cash rate at 4.35% rather than increasing or decreasing it by 25 basis points. This choice was driven by a higher risk of inflation persisting despite recent data suggesting a downward trend.

  • Economic Indicators: Recent data indicated that inflation risks had shifted slightly upward, prompting the RBA to lean towards caution. Inflation had been driven by domestic demand, which remained strong, and underlying inflation was higher compared to other countries.

  • Global Context: The RBA's decision to hold rates contrasts with trends in other global markets where some central banks are lowering rates. The RBA emphasised its commitment to returning inflation to its target range of 2-3% within a reasonable timeframe.

  • Market Impact: The AUD has been supported by the RBA's hawkish stance, showing resilience against major currencies. However, uncertainty remains as the RBA balances the risks of inflation and economic slowdown.

This result and the commentary has given the AUD a boost this week, moving higher against most other currencies for the 2nd week in a row.

Implications for the AUD:

The RBA's decision to hold rates has provided support for the AUD, reflecting confidence in the Australian economy's ability to manage inflation without immediate additional rate hikes. This has helped the AUD remain stable in a global market where other currencies are facing downward pressure due to different monetary policies.

🏦 Bank of England Holds Interest Rates Steady Ahead of General Election 🇬🇧

In a recent policy meeting, the Bank of England (BoE) opted to maintain its key interest rate at 5.25%, a 16-year high, despite UK inflation slowing to 2.0% in May. This decision comes just before the UK's general election on July 4.

Key Points:

  • Inflation and Rates: The UK’s annual inflation rate has dropped to 2.0%, aligning with the BoE's target. Despite this, the BoE chose to hold the interest rate steady, citing the need to ensure inflation remains low.

  • Decision Dynamics: The Monetary Policy Committee (MPC) saw a majority of seven members voting to maintain the rate, while two members favoured a cut. The decision was noted as "finely balanced," suggesting the potential for a rate cut in the next meeting.

  • Market Reactions: The British pound weakened on the news, while the FTSE 100 index saw gains. Speculation is growing that a rate cut may occur in August.

  • Global Context: The BoE’s decision contrasts with the Swiss National Bank, which made a second consecutive rate cut, and Norway, which also froze rates.

Political Neutrality:

The BoE emphasised that its decision was not influenced by the upcoming election, aiming to avoid any perception of political bias.

Economic Outlook:

The UK economy has faced significant challenges, with GDP stagnating in April after emerging from recession earlier in the year. The ongoing high interest rates continue to impact economic activity and disposable incomes.

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