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The Reserve Bank of Australia (RBA) on Tuesday decided to keep the official cash rate on hold at 3.75%, taking most analysts by surprise.
The decision comes after three successive rate hikes were delivered starting from October's policy meeting, with markets widely anticipating a fourth 25 basis points move.
RBA Governor Glenn Stevens noted that lenders across the country generally raised interest rates a little more than the benchmark rate in recent months and most loan rates had risen by close to a percentage point.
"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," he said in a statement.
Stevens added that interest rates to most borrowers were nonetheless lower than average and if economic conditions evolved broadly as expected, it is likely that "monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target"
The governor said that the global economy was growing, with the recovery much quicker to-date in Asia, although he noted that China was now looking to withdraw its stimulus support measures.
He said that while global financial markets were functioning much better than they were a year ago, credit conditions remained difficult as banks continue to face loan losses, and added "concerns regarding some sovereigns have increased".
Stevens noted that inflation had "risen somewhat recently" as temporary factors that had been holding it down were abating. Nevertheless, he said inflation was expected to be consistent with the target in 2010.
The central bank chief said that while housing credit was expanding at a solid pace, business credit has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards.
The Australian dollar edged sharply lower against its major opponents following the bank's interest rate announcement. The Aussie dollar was quoted at 0.8825 against the U.S. dollar, 80.07 versus the yen and 1.5651 against the euro.
The Housing Industry Association (HIA), Australia's largest building industry organization, welcomed the central bank's decision to take a wait and watch stance.
Harley Dale, chief economist at HIA, said the decision to pause the tightening cycle gives the home building sector some much needed breathing space.
"Raising interest rates too quickly runs the risk of choking off a much needed new home building recovery than extends beyond first time buyers and social housing provision," he said.
Australia's economic recovery remains on track but there are some lingering signs of weakness in the economy.
A survey by the National Australia Bank (NAB) released today showed that business confidence fell sharply in December, with the RBA's three straight rate increases widely blamed.
The business confidence index stood at 11 in December, down from 19 in the previous month. The business conditions index, meanwhile, remained stable at 10.
The trading and profitability sub-indices rose marginally by 2 and 1 points, respectively, to 17 and 12 points.
Labor conditions improved markedly, jumping 5 points to 7, indicating increased hiring by firms. This was in contrast to the results of the ANZ Bank job ads survey, which said job advertisements declined 8.1% in January compared to the previous month.
Recent positive signs for the economy include a 5.2% quarter-on-quarter house price gain in the December quarter and a 1.8% monthly increase in commodity prices in January.
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