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Australia Holds Fire on Rates, but for How Long?

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Even as the Reserve Bank of Australia (RBA) left its key interest rate steady at a record low on Tuesday, analysts bet the central bank would ease monetary policy soon to bolster the economy from an imminent peak in mining investment.

Australia's central bank cut rates by 25 basis points just a month ago to 2.75 percent and markets had not anticipated another move so soon, especially since an almost 6 percent fall in the Aussie dollar over the past month has boosted exporters and given the economy a fillip.

The RBA said that there was scope for further monetary easing although policy was appropriate for now. In a sign that the recent fall in the Aussie dollar may not be a barrier to further cuts, the RBA said the currency remained high despite its recent depreciation.

And with the non- resources sector of the Australian economy showing no significant sign of a pick-up as mining investment eases, a rate cut in either July or August seemed likely for now, analysts said.

(Read More: Australia Coal Brace for Years of Mine Closures, Job Cuts)

"At this stage an August cut is on the go and further cuts will be a function of the interest-rate sensitive parts of the economy not growing to the extent that they [the RBA] want and investment falling more than they were anticipating 12 months ago," Tony Farnham, an economist at Paterson Securities told CNBC Asia's "Capital Connection."

Data last week showed capital expenditure by firms on things such as equipment fell a bigger-than-expected 4.7 percent in the first three months of 2013 compared with a 2.1 percent fall in the previous quarter.

Australian Dollar This Year

And even after the RBA cut rates to a record low last month, consumer confidence fell sharply in May. An index of consumer sentiment compiled by the Melbourne Institute and Westpac Bank fell 7 percent in May after a 5.1 percent tumble in April.

"It's a question of timing and it's difficult to say when exactly the RBA will move," Stephen Nash, director of strategy at FIIG Securities in Sydney told CNBC ahead of the rate announcement.

"The RBA keeps telling us that inflation is under control, so they don't have any concerns on that side. What is a concern is getting more momentum in the non-mining sector. We've had a little bit of an increase in established home prices, but construction is really not proceeding that much," he added.

The RBA has slashed interest rates 200 basis points since late 2011 to boost the economy.

(Read More: Beaten Down Aussie Stocks in for 'Winter Wonderland')

Maisant Ludovic | hemis.fr | Getty Images

A private measure of Australian inflation released earlier on Tuesday showed consumer prices rose 0.2 percent in May from April when it increased by 0.3 percent, a sign that price pressures remain muted.

(Read More: Consumer Apathy: Next Threat to Australian Economy?)

Savanth Sebastian, equities economist at Commonwealth Securities, said he expects the RBA to cut interest rates in August just before a general election in September.

He added that the labor market could be the key to the timing of further monetary easing. Australian job advertisements in newspapers and online fell for a third straight month in May, a survey by Australia and New Zealand Banking Group showed earlier on Tuesday.

"A lot more focus is going to be on the real sector [economy] , so jobs in particular, and less so on inflation and they appear happy on that front," said Farnham Paterson Securities.

- By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @DharaCNBC

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