Reserve Bank of Australia holds cash rate at 4.5%, surprising markets who had expected a hike; A$ and NZ$ tumble

The Reserve Bank of Australia has surprised almost all economists by leaving its official cash rate on hold at 4.5%.

Markets had expected an increase to 4.75% as Australia deals with a cash surge from its biggest mining boom in the last 100 years.

The Australian dollar tumbled a full cent vs the US dollar to 95.75 USc while the New Zealand dollar initially fell to 73.5 USc from 73.7 USc before rebounding to 73.9 USc. The New Zealand dollar, therefore, strengthened significantly against the Australian dollar to 77.0 Ac from 76.3 Ac.

Most economists had expected the Reserve Bank to hike after strong commodity price inflation data and bouyant consumer price inflation. This would have lifted the gap between Australian rates and New Zealand rates to over 1.75%.

However, the RBA did appear to warn that it may have to hike the rate in future.

The Reserve Bank of New Zealand is expected to leave its Official Cash Rate on hold at 3% until the end of the March quarter of next year.

"The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being," Stevens said.

"If economic conditions evolve as the Board currently 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," he said.

Here is the full statement below from the Reserve Bank of Australia's Governor Glenn Stevens.

At its meeting today, the Board decided to leave the cash rate unchanged at 4.5 per cent. The global economy grew faster than trend over the year to mid 2010, but will probably ease back to about trend pace over the coming year.

Recent information is consistent with a more sustainable, but still strong, pace of growth in China and most of the Asian region.

In Europe and the United States, growth prospects appear to be modest in the near term, a legacy of the financial crisis and its impact on private and public finances.

Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe.

Most commodity prices have changed little over recent months, and those most important to Australia remain very high.

Information on the Australian economy shows growth around trend over the past year.

Public spending was prominent in driving aggregate demand for several quarters but this impact is now lessening, while the prospects for private demand, and in particular business investment, have been improving. This is to be expected given the large rise in Australia’s terms of trade, which is now boosting national income very substantially.

Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend.

Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year.

That looks likely to continue in the near term. The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade.

The Board regards this as appropriate for the time being.

If economic conditions evolve as the Board currently 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.