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Australia's Central Bank Holds Interest Rates at 6.25%

Reuters
Tuesday, 3 Apr 2007 | 8:49 PM ET

Australia's central bank skipped a chance to raise interest rates on Wednesday, confounding speculation it would tighten to cool domestic demand as insurance against future inflationary pressures.

The Australian dollar slid while bond futures rallied after the Reserve Bank of Australia (RBA) left its cash rate unchanged at 6.25% following its monthly policy meeting on Tuesday.

Investors had been braced for a tightening, given a string of strong economic indicators recently had looked to be threatening the outlook for inflation.

"It's a bit of a surprise in that the RBA had primed the market for a possible move in April," said Brian Redican, a senior economist at Macquarie Bank.

It was a hawkish speech by the central bank's top economist last month that first alerted the market to the risk of an imminent hike.

"Maybe the recent unfavorable news on the U.S. economy gave them pause," added Redican. "Investors will be scratching their heads wondering what the central bank's thinking. The fact is, they had the perfect opportunity to move today and they didn't take it."

Investors reacted by knocking the Australian dollar down almost half a cent to around 80.70 U.S. cents, while three-year bond futures rose 0.045 points to 93.850. Bill futures also rallied but still showed a real risk that interest rates would be raised in May or later.

"I suspect us and the markets will swiftly reprice for a May tightening instead," said Annette Beacher, a senior market analyst at Citigroup. "The Reserve Bank has obviously chosen to assess another month's worth of data - another round of labor market, housing finance and the all-important consumer price index between now and then," she added.

The first quarter consumer price index is due on April 24.

However, some analysts noted that the CPI was unlikely to offer a clear trigger for a rate hike at the May policy meeting. Annual growth in consumer prices was virtually certain to slow from the fourth quarter's 3.3% pace as a large rise in the first quarter of 2006 dropped out of the calculation.

Underlying inflation was also likely to dip below 3.0%, putting it back within the Reserve Bank's 2% to 3% target band.

"The CPI should show another fall in the headline rate of inflation, so a move after the early May meeting will be particularly awkward to explain," said Stephen Walters, chief economist at JPMorgan.

A move later in the year could also clash with the government's budget in May and with the general election that is widely expected in the second half of the year.

"A move around mid-year or later risks RBA policy becoming entangled in the political theatre of the budget and the upcoming election, which likely will be held in October," Walters added. "RBA officials will avoid these unnecessary complications if they can."

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