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Australian central bank unexpectedly leaves key rate unchanged; dollar tumbles

Tuesday 2nd February 2010

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The Reserve Bank of Australia unexpectedly left its benchmark interest rate unchanged at 3.75%, saying lenders had raised rates more than the cash rate in recent months and it wants more time to assess the impact.

The Australian dollar tumbled more than 1 U.S. cent to 88.06 cents after Governor Glenn Stevens’ statement, dragging the kiwi dollar down to 70.56 U.S. cents from 70.86 cents. On the cross rate, the kiwi surged to 80.02 Australian cents from 79.37 cents immediately before the statement.

“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point,” Stevens said in the statement, posted on the RBA website after the bank’s board met today. “Since information about the early impact of those changes is still limited, the Board judged it appropriate to hold a steady setting of monetary policy for the time being.”

The RBA was one of the first central banks in the world to begin tightening monetary policy again as the global downturn dissipated, as the Australian economy skirted recession and demand held up for the nation’s raw materials in markets such as China. It increased the cash rate three times between October and December by 75 basis points.

Stevens said world economic growth is expected to rise “at close to trend pace in 2010 and 2011.

The expansion “is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity.”Asia had recovered more quickly though now authorities in Beijing were looking to reduce stimulus in the world’s third-largest economy, Stevens said.

While global financial markets are functioning much better than they were a year ago, credit conditions “remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness.” At the same time, concern has grown about the debt levels of some nations.

Australia’s economy has been stronger than expected as households have been helped by a relatively robust labour market and a recovery in net worth, he said.

“Public infrastructure spending is now boosting demand, as is an upturn in housing construction,” he said. “Investment in the resources sector is strong. The rate of unemployment appears to have peaked at a much lower level than earlier expected.”

Inflation is expected to be consistent with the target in 2010, he said.

Credit for housing has been expanding at a solid pace, and dwelling prices have risen significantly over the past year. “Business credit, in contrast, has continued to fall, as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said.


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