Australia's central bank skipped a chance to raise interest rates on Wednesday as turmoil in global credit markets clouded the outlook for the world economy, even as economic growth at home hit a three-year high.
The Reserve Bank of Australia (RBA) said it remained concerned about inflation, but the uncertain global outlook meant rates should stay at an 11-year high of 6.75 percent for the time being.
The central bank's new-found caution overshadowed news that Australia's economy grew a brisk 1.0 percent in the third quarter and 4.3 percent from a year earlier, as consumers went on a spending spree.
Bond and bill futures rallied while the Australian dollar slipped as investors priced in less chance the central bank would follow two rate rises this year with a further increase next year.
"By highlighting the global risks the RBA forced the market to reconsider expectations for another hike in February," said Rory Robertson, interest rate strategist at Macquarie.
The statement itself was a surprise because traditionally the central bank doesn't comment when leaving rates unchanged.
The central bank said that, as part of a new communication policy, it would now issue a statement after every meeting, publish the minutes of those meetings and announce its rate decision on the day its meets.
The big change in Wednesday's statement was a downgrading in the formerly optimistic outlook for world growth, with the RBA noting prospects for the major economies seemed to be weakening.
"That clearly has dovish overtones," said Su-Lin Ong, a senior economist at RBC Capital Markets. "It suggests the credit crunch has the potential to stop the RBA's tightening dead in its tracks."
Global Rate Cutting
Analysts noted that so dire was the situation in the United States, that the Federal Reserve might slash rates by half a percentage point when it meets on Dec. 11.
On Tuesday, the Bank of Canada surprised many by cutting its rates in response to the worsening U.S. outlook, a major turnaround given it was tightening as late as July.
"The global tightening cycle of recent years is rapidly morphing into a global easing cycle," said Macquarie's Robertson. "That leaves the RBA standing out from the crowd and gives reason to doubt that further action here will be needed."
Australia's central bank has raised rates twice since August in an effort to cool a red-hot economy and restrain inflation.
Indeed, its rate statement came just a couple of hours before the government reported the Australian economy grew 4.3 percent in the year to the third quarter, a big step up from 3.7 percent in the second quarter and the fastest pace since mid-2004.
Overall, gross domestic product climbed to A$255.8 billion (US$224 billion) in the third quarter, putting Australia well on course for its first trillion dollar year.
Consumers led the way, spending more on recreation, home wares and clothing, and contributing a hefty 0.7 percentage point to growth in the quarter.
"The consumer is looking very strong," said Adam Carr, a senior economist at UBS.
He also noted that households were saving more of their income, suggesting there was ample scope for continued consumption growth going forward.
"That's a key positive. At the end of the day you are still looking at a domestic economy running in the order of 5.5 percent," said Carr. "That doesn't really take the edge off some of the inflationary pressures in the medium term."