Australia in surprise rates freeze

SYDNEY: Australia's central bank Tuesday left interest rates on hold at 3.75 percent, surprising analysts by ending a sequence of three consecutive rises, but hinted at further hikes to come.

Australia led the developed world in lifting interest rates after the global financial crisis, increasing its official cash rate 25 basis points to 3.25 percent in October and again in November and December.

"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," Reserve Bank of Australia (RBA) governor Glenn Stevens said.

Economists had expected another rate rise at the first board meeting of 2010 and Stevens, who said conditions were stronger than expected in Australia, said another increase to the official cash rate was likely in the future.

"If economic conditions evolve broadly as expected, the board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term," he said in a statement.

Stevens said while the world economy was growing and financial markets were functioning better than a year ago, concerns still remained.

"In Asia, where financial sectors are not impaired, recovery has been much quicker to date, though the Chinese authorities are now seeking to reduce the degree of stimulus to their economy," he said.

"Credit conditions nonetheless remain difficult in the major countries as banks continue to face loan losses associated with the period of economic weakness."

Australia's economy managed to ride out the global downturn without entering recession, helped by 70 billion dollars (62 billion US) in stimulus measures, which included cash cheques to millions of Australians and an infrastructure spending programme.

But the central bank also radically slashed interest rates from late 2008, wiping 425 basis points from the rate take it as low as 3.00 percent.

Analysts applauded the central bank's latest decision.

"We feel the RBA has acted prudently in raising rates aggressively, but is smart in now adopting more of a wait-and-see approach," IG Markets research analyst Ben Potter said.

Equities economist at CommSec Savanth Sebastian said while rates remained low, the RBA had rightly taken a "strategic pause" in the hiking process to assess the situation.

He said concerns that any attempt by Chinese authorities to slow down the Asian giant's economy could have a knock-on effect on Australian growth and could have weighed on the central bank board.

But he said mortgage holders were likely to face a new rate hike soon.

"There's going to be a rate hike over the next two months," he told AFP.

The Australian share market reacted positively to the news, closing at its high of the day, up 81.3 points, or 1.80 percent, at 4,605.4.

But the Aussie dollar dropped more than one US cent -- falling from 89.25 US cents before the decision to 88.11 US cents within three hours.

"The utter surprise of the RBA action is likely to pressure the unit to the downside," said Boris Schlosberg, strategist at GFT Forex.