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SYDNEY - Australia's central bank left interest rates unchanged at 6.25 per cent today, a decision widely expected in markets given signs past increases are working to contain inflation.
The board of the Reserve Bank of Australia (RBA), which held its monthly rate setting meeting on Tuesday, does not comment on its reasoning when leaving policy unchanged.
But the central bank is due to issue its latest quarterly statement on monetary policy next Monday, and analysts suspect it will caution that rates may yet have to rise again.
"Given the strength of the global economy and all those factors that continue to put pressure on labour and capital prices, the RBA will want to keep their tightening bias," said Stephen Halmarick, co-head of market economics at Citigroup.
The central bank raised rates three times last year to cool inflation and as recently as three weeks ago the market was pricing in a 50:50 chance of another move this month.
All that changed when data for the fourth quarter showed consumer prices fell for the first time in eight years and underlying inflation slowed back within the RBA's 2 per cent to 3 per cent target band.
Markets quickly reacted by pricing out any chance of a rate rise for this meeting, which is why the steady decision had little impact on the Australian dollar, bonds or stocks.
Looking forward, consumer price inflation is set to slow further this year, thanks to a reversal of past increases in petrol and fruit, and some analysts suspect underlying inflation might also be past its peak.
"If we get another very low core rate, it's very likely that we'll have an annual core rate in the middle of the band by the end of this year, in which case real rates are probably a little bit too high," said Michael Workman, a senior economist at Commonwealth Bank.
POSSIBLE EASING
If so, it could open the door to a policy easing later in the year. A Reuters survey of 20 economists taken last week found 13 thought the next move in rates could be down, though probably not for many months and maybe not until 2008.
Even the doves on rates conceded that Australian consumers were proving resilient to higher borrowing costs, thanks in part to a record level of household wealth.
The country's resource exporters were also benefiting from past increases in commodity prices and robust global demand.
Crucially, the labour market remains drum-tight with unemployment down at 30-year lows of 4.6 per cent after employers created an impressive 300,000 new jobs last year.
"The RBA's biggest concern remains that Australia is running out of workers and that could lead to wage and price pressures," said Rory Robertson, interest rate strategist at Macquarie Bank.
"That means it will keep a tightening bias, but really with inflation contained and unemployment low, it must be very pleased with where the economy is," he added.
The focus on the labour market makes every employment report a major event for markets. Figures for January are due on Thursday and median forecasts are for a only a modest 5,000 rise in jobs as payback for December's huge 44,600 jump. But this series has a habit of surprising and estimates range from a 30,000 fall to a 25,000 increase, suggesting plenty of scope for a market-moving outcome.
- REUTERS
