Central Banks

Australia central bank holds rates at 2.5%

Australia rate stability to last until year-end: Economist

The Reserve Bank of Australia (RBA) on Tuesday left interest rates steady at a record low of 2.5 percent for the 12th month, as expected.

In its policy statement the central bank repeated that the prudent course is likely to be a period of stability for interest rates, noting that inflation is consistent with its target. It expects below-trend growth in the year ahead but sees signs of improvement in the labor market this year.

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"We expect the RBA to do absolutely nothing until the end of the year. The economy seems relatively balanced at the moment, some positives some negatives [so] the RBA is taking a 'wait and see' approach in terms of policy," said Callum Henderson, global head of foreign currency exchange research at Standard Chartered.

"They've been saying for awhile now there's going to be a period of stability in interest rates and they are styaing true to that course and they are probably going to keep the rates on hold for the rest of 2014. You have GDP (gross domestic product) growth around 3 percent and inflation around that mark as well, so moving forward the RBA is likely to keep the cash rate at around 2.5 percent for the rest of 2014," said Matthew Circosta, economist at Moody's Analytics.

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The central bank also said that the Australian dollar is high by historical standards and offers less help to the economy than it might in achieving balanced growth.

"The RBA is right - [the Aussie] certainly is high by historical standards and it has a couple of effects here. It keeps a lid on inflation for the past 12-18 months, it is also hurting import and export-competitive industries such as tourism and manufacturing, so it's having some dampening effect on growth and inflation," Circosta added. "Clearly the RBA will want it lower than it is, we think they will get that... towards 85 cents or 90 cents level."

Reserve Bank of Australia (RBA) headquarters in Sydney, Australia.
Dan Himbrechts | Bloomberg | Getty Images

The Aussie was slightly lower at $0.9326 following the decision. Ahead of the decision, the Aussie reached a session high of $0.9337, pulling further away from a two-month trough of $0.9275 plumbed on Friday.

The currency has been on an upward trend since late January, up 4.6 percent so far this year, but still off its peak of $0.9504 on July 1.

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"I think from here to year-end, we're still in relatively constructive environment for risks, for higher yield currencies, [so] we're expecting the Aussie to remain relatively stable till the end of the year," said Henderson.

The central bank slashed rates to a record low last year to support an economy struggling with a slowdown in its key resource sector, as demand from China cools.