Australia holds rates unchanged but says future cuts still possible

Sydney: Australia unexpectedly kept interest rates unchanged as two cuts late last year help the economy weather Europe's debt crisis, sending the nation's currency soaring to a six-month high.

"Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made," Reserve Bank Governor Glenn Stevens said in a statement yesterday announcing that the official cash rate target will stay at 4.25 per cent, the highest level among the world's major developed economies.

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

Hiring boost

Stevens' first rate decision of the year reflects confidence that the US and Chinese economies will withstand a European recession and domestic unemployment will stay close to 5 per cent as A$456 billion (Dh1.8 trillion) in resource projects boost hiring. He signalled a willingness to lower borrowing costs if conditions warrant an easing of monetary policy.

"The bias is still to cut, that much is clear," said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd, a unit of the world's biggest interdealer broker, who predicted yesterday's decision.

"But they've tied it to a weakening in demand, which is appropriate."

Carr was one of three economists surveyed by Bloomberg News to predict a pause. The other 24 forecast a quarter-percentage-point reduction.

Asian stocks swung between gains and losses. The MSCI Asia Pacific Index rose 0.2 per cent in Tokyo. Australia's S&P/ASX 200 Index slipped 0.5 per cent in Sydney, erasing earlier gains of as much as 0.4 per cent.

Australia's currency strengthened to as much as $1.0811 in Sydney, the highest since August 2, compared with $1.0705 immediately before the decision was announced. The Australian dollar, the world's fifth-most traded currency, has increased 5.7 per cent this year.

Interbank cash-rate futures for March were yielding 4.115 per cent, indicating traders expect Stevens to lower rates that month.

Stevens trimmed the nation's benchmark interest rate by a quarter percentage point to 4.5 per cent on November 1 and to 4.25 per cent on December 6 to help revive household demand and hiring.