RBA keeps interest rates on hold

7 Feb 2012, 5:45 pm   -   Source: AAP
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The Reserve Bank of Australia has kept interest rates on hold as it waits to assess the impact of Europe's debt crisis on the global economy

The Reserve Bank of Australia (RBA) has surprised the market in the face of widespread expectations of a rate cut by keeping interest rates on hold.

The central bank cited an improvement in the European sovereign debt crisis and a continuing moderate expansion in the United States after a soft patch in mid 2011 as the reasoning behind the decision at its first board meeting of the year.

The RBA had been widely expected to cut interest rates for the third time since November at its February board meeting on Tuesday.

Thirteen out of 14 economists surveyed by AAP prior to the decision forecast a quarter of a percentage point cut to bring the cash rate to four per cent, amid ongoing pessimism about Europe's debt crisis.

Commonwealth Bank chief economist Michael Blythe said the decision to hold rates steady had come as a surprise to economists and markets.

"The Reserve Bank has an infinite capacity to surprise and today was no exception," he said.

Mr Blythe said it appeared the combination of improved US economic data, positive signs from Europe and the stabilisation of markets had convinced the RBA to hold rates for now.

He said a rate cut could come as early as March if Europe's debt crisis took a turn for the worse.

RBA governor Glenn Stevens said in a statement on Tuesday that the acute financial pressures on banks in Europe had improved significantly since late 2011.

"Financial market sentiment, though remaining skittish, has generally improved since early December," he said.

The RBA cut its benchmark interest rate in November and December, taking it from 4.75 to 4.25 per cent to protect against flow-on effects from the European debt crisis.

UBS interest rate strategist Matthew Johnson said the RBA would be waiting for more inflation data when the Australian Bureau of Statistics published the March quarter consumer price index on April 24.

"This makes the May meeting the next one where the rate decision is probably live, if the unemployment rate starts pushing up again or there is a Greek (government debt) meltdown," Mr Johnson said.

"I think it's quite possible that they are on hold for a couple of months."

In his statement on Tuesday, Mr Stevens said underlying inflation was around 2.5 per cent, in the middle of the RBA's inflation target range of two to three per cent.

"CPI inflation has declined as expected, as the large rises in food prices resulting from the floods a year ago have been unwinding," Mr Stevens said.

Economists say that moderating inflation is another reason for the RBA to contemplate further rates cuts in coming months.

The unexpected decision to keep rates on hold on Tuesday led to the Australian dollar jumping to a fresh six-month high.

The local currency spiked by more than 0.7 cents to 107.79 US cents immediately following the RBA's announcement.

It traded as high as 108.12 US cents during Tuesday afternoon, its highest level since August.

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