The Reserve Bank of Australia surprised the market by keeping rates steady at 3.25% sending the Aussie dollar through the key 1.0400 barrier in mid morning Asian trade. Ahead of the announcement 20 out of 27 economists surveyed by Bloomberg forecast that the RBA would cut rates by another 25bp to 3.00%.

However, the RBA statement reflected a much more hawkish tone than the market anticipated with the central bank noting that inflation was slightly higher than anticipated while the outlook for global economy was more positive with growth in China stabilizing. “With prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being,” said Glenn Stevens. governor of the RBA.

One possible reason for RBA’s caution on the interest rate front is the pickup in demand in Australia’s housing market. Last month the country saw a strong jump in Building Approvals to 7.8% from 1.1% eyed and monetary officials in Sydney may have decided that they did not want to spark demand further given the fact the most of Australian mortgages are based on floating rather than fixed interest rates.

Although the RBA remained focused on inflation rather than growth it did note that the Australian dollar was trading higher than expected and implying that its strength was clearly hampering the country’s exports. Analysts believe that Australia may have lost as much 37,000 jobs in manufacturing over the past four years due to competition pressures caused by the rising currency. Today’s move will only aggravate that dynamic, as the decision to keep rates on hold will preserve Aussie attraction as the preeminent carry trade in the currency market and could push the pair higher towards the 1.0600 figure over the next several weeks.

One Comment

  1. BABAK says:

    1-If infla rate has been met expectation why they (govt) didnt cut the rate ?
    2-what is the diff between flo and fix interest rates?
    who is responsible for flo interest rates?

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