Central Banks

Australia's central bank leaves key rate steady at 2.5%

Moody's: RBA is watching labor market closely

The Reserve Bank of Australia (RBA) on Tuesday left interest rates unchanged at a record low of 2.5 percent, in line with market expectations.

In a statement, the central bank said the Australian dollar remains historically high. The RBA added that it sees a period of stability for interest rates and an improvement in the labor market, although it would be sometime yet before unemployment declines consistently.

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The central bank's decision comes a week before the coalition government is due to hand down its first budget since winning the elections in September last year.

The government has already warned of a tough budget, which will likely include temporary income tax hikes, raising the retirement age and cuts to spending on social services in a bid to trim the country's deficit.

Reserve Bank of Australia (RBA) headquarters in the central business district of Sydney, Australia.
Lisa Maree Williams | Bloomberg | Getty Images

"The RBA is comfortable with where things sit at the moment," said Matthew Circosta, an economist at Moody's Analytics. "It's interesting they mentioned the budget, the government is talking tough ahead of the federal budget next week."

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"I agree with the sentiment on the labor market, I think that's what they are going to be watching closely over the next three to six months and that is probably where we need to look at for where rates are headed. If we start to see a meaningful decline in unemployment rate, then the RBA will start consider hiking rates," he added.

The Australian dollar popped above 93 U.S. cents to a new one-week high and continued to trade around that level for the rest of the day, while Australian shares closed 0.35 percent higher on Tuesday.