SYDNEY, Oct 5 (Reuters) - Australia's central bank held its key cash rate steady at 4.5 percent on Tuesday in a surprise to many who had expected a hike, though it did say that higher rates would be needed at some point.
The Reserve Bank of Australia (RBA) announced the decision in a brief statement after its monthly policy meeting. The central bank had already led the developed world in hiking 150 basis points between October and May. ****************************************************************
KEY POINTS:
- RBA left its benchmark cash rate at 4.5 percent for a fifth month. Market had been leaning toward a hike
- RBA statement says if economic conditions evolve as it expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.
- RBA says growth around trend, inflation to run around 2.75 percent for near term.
- Text of the statement can be found on
COMMENTARY:
PETER JOLLY, RESEARCH HEAD, NATIONAL AUSTRALIA BANK "It's surprising. I guess the short of it is that it is not prepared to raise interest rates yet. Today, the public was there and ready to take a hike but they chose not to so clearly there is no urgency and they will take their time. They inserted a new line to say higher rates will be required at some point so it's conceivable that there will be a hike before Christmas. They are not particularly hawkish, but it's very clear where their biases lie. There's a bit of a steepening trade going on in the yield curve today, with some aggressive moves in the front end. But ultimately, I think the yield curve would still flatten and invert."
STEPHEN ROBERTS, ECONOMIST, NOMURA
"I thought they would hold on today, waiting for more data. I think there will be enough in the CPI data to increase interest rates in November. If the RBA goes once, they will go twice, so November and December but it's contingent on what happens with the CPI, what the inflation outlook is and how growth is evolving as well.
If they see inflation measures starting to move upwards on a quarter on quarter basis, that would be more than enough for them to make that move in November in anticipation for 2011.
Its next move after that is always a tricky one because it means they are moving into another bracket of interest rates."
BRIAN REDICAN, SENIOR ECONOMIST, MACQUARIE
"It was a surprise to us. The statement makes it clear higher rates will be needed at some point and, if anything, makes a case for a move now. So it's not quite clear why they decided to wait. Maybe it was the high Australian dollar. Maybe all this talk of quantitative easing in the U.S. and UK made them cautious.
November is still a possibility for a move, but much will depend on the quarterly inflation data later this month. A hike seems more data-dependent than we thought."
KATE KING, SENIOR ECONOMIST, ST GEORGE BANK
"It (a rate hike) was pretty much 70-percent priced in, so that's why you have seen a fairly dramatic reaction in the Australian dollar and bank bills.
The question now is will they go in November instead? So the focus will be back on the September CPI, so a print (inflation rate) above 3 percent would see the RBA back on notice to tighten policy and I'd say that, at that stage, they would have no choice but to increase."
HELEN KEVANS, ECONOMIST AT JPMORGAN
"It seems the RBA is still concerned about conditions offshore, particularly financial market conditions. Conditions domestically clearly warrant higher rates. So we do forecast another move before the year-end.
"I think we will see a series of rate hikes next year. It will depend on local banks response to RBA's tightening and also the strength of the Aussie dollar. The Aussie continues to strengthen as we forecast and we could see a little less tightening in 2011. But at this stage we are still forecasting another four rate hikes next year."
MICHAEL WORKMAN, SENIOR ECONOMIST, COMMONWEALTH BANK OF AUSTRALIA
"It comes as a big shock as the markets were pretty aggressive in pricing in a rise.
"They seem to need further evidence, particularly on inflation. They're quite upbeat on the growth outlook, but they appear to be waiting for some more price information, which I presume will be Q3 inflation on the 27th.
They've said they see higher interest rates as necessary...and we're still expecting a hike in November."
ANNETTE BEACHER, SENIOR STRATEGIST, TD SECURITIES
"It looks like the data has won over the noise. It is the data and the low inflation outlook that prevails. It just seems the RBA are completely independent of the so-called RBA watchers, and they are using the benign near-term outlook to keep interest rates steady for a little longer.
"The near-term inflation outlook is such that they can sit tight for a couple more months and resume tightening next year, so we expect 100 basis points next year."
MARKET REACTION:
- The Australian dollar
BACKGROUND:
- The RBA raised rates by 150 basis points in six steps between October and May as the economy recovered quicker than anyone expected.
- Underlying inflation duly moderated to an annual pace of 2.7 pct, back in the RBA's 2 to 3 pct target band, allowing it to take a pause on policy.
- Yet the economy grew a brisk 1.2 pct in Q2, led by strong household consumption and surging resource exports to China and India. Asian demand is fuelling record investment in mining and LNG which the RBA expects will drive growth for years to come.
- Resilience in consumption is also a challenge to the central bank which has been hoping spending would stay subdued and leave room for mining to boom without creating inflation.
- Unemployment is already down at 5.1 pct and leading indicators of labour demand point to a further decline ahead, suggesting price pressures will build next year.
- The majority of analysts in a Reuters poll had expected a move to 4.75 percent today and to 5.5 percent by the end of next year. [AU/INT].
(Reporting by Sydney newsroom)