RBA Unexpectedly Paused After 2 Successive Rate Cuts

The RBA unexpectedly left the cash rate unchanged at 4.25% in February, in contrast with consensus of a rate cut by -25 bps. The decision, in spite of growing uncertainty in the sovereign debt crisis in the Eurozone, indicated policymakers' confidence in China's demand and US' economic recovery. The Australian dollar soared after the announcement.

The situation in the 17-nation region Eurozone remained worrisome. As noted in the policy statement, the RBA acknowledged that 'economic conditions in Europe were weakening late last year, with risks still skewed to the downside'. While corrective actions have been made to contain the crisis, 'much remains to be done to put European sovereigns and banks on a sound footing'. Economic conditions in the US, however, have shown improvements. Recent economic data pointed to 'a continuing moderate expansion after a soft patch in mid 2011'. In China, while growth has slowed, 'most indicators remained quite robust through the second half of last year'.

Domestically, Australian economic growth is still expected to be 'close to trend'. The central bank appeared to be relaxed despite weakening in the job market, acknowledging that 'labour market conditions softened during 2011 and the unemployment rate increased slightly in mid year, though it has been steady over recent months'. Concerning inflation, policymakers believed that near-ended CPI inflation will 'fall further over the next quarter or two' while core inflation will hover around 2.5%

The decision to leave interest rates unchanged was driven by the situation that 'interest rates for borrowers have declined to be close to their medium-term average' since the last 2 reductions. The central bank believed the monetary policy setting is 'appropriate' for the moment. Yet, the RBA pledged that easier monetary policy is still warranted ifthe market conditions deteriorate markedly.