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RBA Leaves Cash Target Rate at 6.5%

The Reserve Bank of Australia (RBA) said Wednesday its board decided to leave the cash target rate at 6.50 percent after Tuesday's monthly policy meeting.

Economists had expected no change in the rate this month but believe the central bank stands ready to hike rates further once federal elections are over. The RBA raised the rate by 25 basis points last month to help contain inflation.

Economists believe the RBA's decision to leave monetary policy steady was partly due to the recent financial market instability which reduced liquidity in credit markets.

The Federal Government is yet to call an election but Prime Minister John Howard said this week that elections will be held well before Christmas.

Political analysts are tipping Oct. 27 as the most likely election day.

The central bank is likely to remain on hold for the remainder of the year unless third-quarter consumer inflation data, due on Oct. 24, reads on the high side, said NAB Capital Markets chief economist Rob Henderson Henderson said Tuesday's release of second-quarter gross domestic product data, showing that Australia's economy grew by a brisk 4.3 percent from a year earlier, suggests that the RBA will maintain a tightening bias.

He said continuing strong economic growth, which could fuel inflationary pressures, means the odds of another rate hike ahead have gone up with NAB Capital Markets putting them at 40 percent plus.

After the second-quarter GDP data was out, the market priced in around a 60 percent chance of a 25 basis point rate hike at the RBA's February 2008 meeting.