Central Banks

Reserve Bank of Australia keeps rates unchanged at 1.5 percent, signaling cutting cycle may be over

RBA doesn't want to cut rates further: Economist
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RBA doesn't want to cut rates further: Economist

The Reserve Bank of Australia (RBA) held interest rates steady at record low 1.5 percent on Tuesday, as expected, and appeared to signal it would remain on hold for some time.

The RBA said that it expected the economy Down Under would grow around 3 percent annually for "the next couple of years" and that inflation would pick up to above its 2 percent target over the course of this year.

"There is no longer an expectation of further monetary easing in other major economies," the statement on Tuesday said. "The board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."

Analysts read that as a signal the central bank wouldn't be cutting rates anytime soon.

"This is very clearly a message from a central bank that does not want to cut interest rates any further," Paul Bloxham, chief economist for Australia and New Zealand at HSBC, told CNBC's "Street Signs" on Tuesday after the decision."

"We think the RBA is unlikely to cut interest rates any further and indeed, we think the next move for the RBA is more likely to be up than down, although not until 2018," he said.

Expectations interest rates were at their nadir would likely support the Australian dollar, which climbed as high as $0.7675 after the decision, compared with around as low as $0.7637 just before the announcement.

The decision to remain on hold came even as inflation remained sluggish. For the October-to-December quarter, data released in late January showed inflation Down Under was 1.5 percent on-year, slightly lower than expected, and still below the central bank's 2 percent target..

Flag of Australia on a beach
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But even with the weak price data, analysts were unsurprised by the RBA staying on hold, noting the RBA was likely to be watching developments in the housing market closely.

The statement noted that housing markets around the country "vary considerably," with some areas seeing prices "rising briskly" and greater demand from investors. It also noted that lending standards have been strengthened.

Data reported last week showed the housing market remained on the boil, with prices in capital cities rising 10.7 percent in 2016, up from 7.4 percent a year earlier, according to data from property consultant CoreLogic.

Analysts had expected housing market developments would stay the RBA's hand.

"With inflation consistently tracking below the RBA's target range for almost three years, it's likely that the heat in the housing market is one of the primary reasons why the cash rate hasn't moved lower in an attempt to stimulate spending and push inflation higher," Tim Lawless, head of research at CoreLogic, said in a note on Monday, before the RBA announcement.

Expect RBA to stand pat: Economist
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Expect RBA to stand pat: Economist

Other analysts had also anticipated the on-hold decision.

"The Reserve Bank cut rates twice last year, in May and August, and I think the reaction that we saw in the housing market off the back of those cuts really caught them by surprise," Gareth Aird, senior economist at Commonwealth Bank, told CNBC's "The Rundown" on Tuesday before the decision.

"They cut the interest rate because inflation printed a lot lower than they expected but then we saw the housing market really kick off," he said.

Aird expected the RBA would remain on hold ahead.

"There's plenty of spare capacity here in the economy. I doubt we're going to see a material pickup in wages or inflation," he said, but added, "I think it's that housing story that will see them sit on the sidelines."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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