Contrary to widespread expectations of an interest rate cut, the Reserve Bank of Australia has held rates steady.

“With growth expected to be close to trend and inflation close to target, the board judged that the setting of monetary policy was appropriate for the moment,” said RBA governor Glenn Stevens in announcing the decision.

The RBA left its cash rate unchanged at 4.25 percent. This followed cuts of 25 basis points each in November and December.

Illustrating how much of a surprise the RBA's inaction was, the Australian dollar jumped nearly a US cent after the announcement.

Stevens said since these two rate cuts, interest rates for borrowers have declined to close to their medium-term average.

He said the Australian dollar had risen further despite weakening terms of trade and this largely reflected the euro's decline against all currencies. “Nonetheless, the Australian dollar in trade-weighted terms is somewhat higher than the bank had previously assumed,” he said.

“Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy,” Stevens said, saying the board will continue to monitor the situation.

The RBA said underlying annual inflation is currently about 2.5 percent and that it expects over the next two years, excluding the carbon price, it will be within the 2 percent to 3 percent range.

While Australia's unemployment rate rose slightly in the middle of least year, it has been steady over recent months, it said.

“Credit growth remains modest, though there has been a slight increase in demand for credit by businesses.” Housing priced showed some sign of stabilising at the end of 2011 after declining for most of that year.

The RBA said the risks in Europe are still skewed to the downside but the acute financial pressures on European banks were alleviated considerably late in 2011 by the actions of policymakers.

“Much remains to be done to put European sovereigns and banks on a sound footing but some progress has been made.” Recent data suggests the US economy is moderately expanding and Chinese growth has slowed as expected but remains quite robust.

While commodity prices have declined, they remain at quite high levels and, although they remain “skittish,” financial markets have generally improved since early December.

Term funding markets have reopened for Australian banks, “albeit at increased cost compared with the situation prevailing in mid 2011.”

(BusinessDesk)