RBA Shocks Markets: Cash Rate Unchanged

The Reserve Bank of Australia surprisingly left its cash rate benchmark unchanged at 3.75% at its monthly monetary policy meeting. The decision took markets by surprise as a broad consensus among investors’ expectations pointed to a 0.25% rate hike for the fourth time in a row to 4.00%. The RBA was the first central bank in the G20 to raise rates since the recession, tightening three consecutive times since October last year. According to its recent statement, the information about the impact of those rate hikes is still limited and therefore it is “appropriate to hold a steady setting of monetary policy for the time being”.

Market participants largely expected cash rate to rise based on positive jobs-market data, stronger-than-expected inflation for the last quarter and strong demand for Australia’s commodities from China and India. Unemployment appears to have reached its peak at 5.8% in October, a much lower level than previous estimations of 8.5%. The Consumer Price Index rose 0.5% in the fourth quarter of 2009 and the underlying inflation rose from 1.3% to 2.1% annualized, entering the target band of the RBA of 2 to 3 percent. According to the central bank, inflation is expected to be consistent with the target in 2010.

Investors still believe that Australia’s economic conditions support further rate hikes and will follow the domestic data this month to try to assess the outcome of the next monthly meeting.

The Aussie dollar plummeted across the board as the news hit the markets. AUD/USD took a nose dive from above 0.89, falling below the 0.88 level.

AUD/USD, 15 min.

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