Published: Tuesday, 4 Aug 2009 | 1:10 AM ET

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Australia's central bank kept its key cash rate steady at a record low of 3.0 percent on Tuesday, but took a small step toward eventual hikes by dropping its easing bias.

The Reserve Bank of Australia (RBA) announced the decision in a brief statement following its monthly policy meeting.

The market had seen virtually no chance of a cut given the central bank's recent optimism on the economic outlook and many assumed it would drop its easing bias and shift to a neutral stance in Tuesday's statement.

Earlier in the session, retail sales data surprised by slipping in June but upward revisions to previous months and a jump in house prices all played to expectations that interest rates would eventually head higher.

Already riding a wave of global economic optimism, the Australian dollar

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[AUD=  Loading...      ()   ] reached fresh 10-month highs after the government data, while bill futures slid as investors priced in rate hikes as early as December.

Retail sales for June were weak on the surface as a 1.4 percent drop contrasted with forecasts of a 0.6 percent rise. Yet sales for April were revised up to show a 1.0 percent increase, from the original 0.3 percent, while May was equally upbeat.

That meant sales for the entire second quarter rose 2.0 percent to A$55.04 billion ($46.6 billion) in inflation adjusted dollars, the biggest increase since the third quarter of 2007.

That resilience could be a lifesaver for Australia as retail sales account for around 23 percent of the economy and the sector is the biggest employer with about 15 percent of all jobs.
    
Positive For GDP

Michael Blythe, chief economist at Commonwealth Bank, said the rise in sales pointed to a healthy rise in consumption in the quarter which would add to gross domestic product (GDP).

"It certainly increases the odds that we won't see another negative GDP number and will have to see another upward revision to economic growth forecasts for Australia," he added.

Australia was perhaps alone among developed economies in boasting a rise in GDP in the first quarter, which did a lot to counter the worst fears among consumers and business.

The revival in the economy was highlighted by a 4.2 percent quarterly jump in house prices in the second quarter, also reported on Tuesday. That was more than double the market forecast and put an emphatic end to four quarters of falls.

Prices were down 1.4 percent on the second quarter of last year, a marked turnaround from a 6.2 percent pace of decline the previous quarter and modest compared to double digit falls
suffered in the United States and the UK.

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Indeed, just last week RBA Governor Glenn Stevens warned of the risk of a house price bubble should home building not increase to meet rising demand.

That was one reason investors had moved to aggressively to price in higher interest rates here, even while much of the rest of the world has yet to emerge from recession.

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