Australia Central Bank on Hold, Says Currency to Fall More

Ian Waldie | Bloomberg | Getty Images

The Reserve Bank of Australia (RBA) kept interest rates unchanged at a record low 2.75 percent on Tuesday, in line with market expectations that a weaker Australian dollar would prevent them from making a cut.

July's decision marks the second month in a row that the RBA has left interest rates unchanged after making a 25 basis point cut in May - it's only move this year. The central bank, however, maintained its easing bias saying that there was scope for future easing and it expects the Australian dollar to fall further.

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Matthew Circosta, economist at Moody's Analytics said the RBA's decision was on the mark with expectations because factors that led to rate cuts in the past no longer exist to the same extent.

"What was driving that [rate cuts] was the strength of Aussie dollar and some weakness in non-mining sectors of the economy," Circosta told CNBC.

"The Aussie dollar is about 11 percent off in over the last three months and we are starting to see some green shoots in the retail and housing space - signs are looking good and that's allowed the RBA to stay on the sidelines."

Data on Monday showed signs that low rates in Australia may be working to fuel the economy. Figures from property consultant RP Data - Riskmark showed that home prices in major cities rebounded 1.9 percent in June from May to make up for falls in the previous two months, Reuters reported.

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Kumar Palghat, director of Kapstream, which runs fixed income funds, backed that sentiment saying a weaker Aussie dollar is one of the two things the RBA wants to kick start the economy.

"One thing is you [central bank] want lower interest rates or second you depreciate currency or let your currency fall," Palghat said. "I don't see why Aussie dollar doesn't go down a little bit more like the RBA is saying, because circumstances of when the Aussie dollar was $1.10 compared to what it is now at 92 cents have changed."

Markets were pricing a less than 20 percent chance of a 25 basis point cut by the RBA on Monday with economists telling CNBC that a sharp drop in the Australian dollar is doing most of the work for the central bank.

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The Australian dollar fell more than 0.5 percent after the RBA's decision in afternoon Asian trade to a session low of $0.9157.

The commodity currency has been sharply falling from a January peak of $1.059 this year on falling commodity prices, a slowdown in Australia's largest trading partner China and the likelihood of tapering of monetary stimulus in the United States.

- By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu