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Aussie Jumps as RBA Keeps Cash Rate on Hold

Aussie Jumps as RBA Keeps Cash Rate on Hold

2012-02-07 04:16:00
Eric Andersen,
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THE TAKEAWAY: RBA Maintained Interest Rate at 4.25 percent > RBA action at odds with analysts’ expectations of rate cut > AUDUSD peaks at 1.800 dollars

  • RBA maintained interest rate at 4.25 percent
  • RBA Board cited inflation close to target, growth close to trend, and strong U.S. economic data among reasons for continuing rates at current level.
  • Analysts expected 75 percent probability that RBA would cut key interest rates 25 basis points
  • Dovish rhetoric suggests that RBA will cut rates in the future in order to foster economic growth.
Aussie_Jumps_as_RBA_Keeps_Cash_Rate_on_Hold_body_Picture_5.png, Aussie Jumps as RBA Keeps Cash Rate on Hold

The Reserve Bank of Australia (RBA) decided to leave its cash rate unchanged at 4.25 percent. The RBA Board noted three factors in its decision: interest rates for borrowers have declined to medium-term average, inflation is around target, and economic growth is expected to be close to trend. Current inflation lies around 2.5 percent and is expected to decline over the next two quarters. The RBA Board says that it will adjust the cash rate in the future to foster economic growth and maintain low inflation.

The RBA’s decision to leave interest rates unchanged drastically contrasts analysts’ expectations. Before the announcement, analysts expected a 75 percent probability that the RBA would cut its cash rate by 25 basis points from 4.25 percent to 4.00 percent. After news that the RBA’s announcement contrasted expectations, bullish traders pushed the AUDUSD exchange up to a peak of $1.080.

The rhetoric of the RBA’s statement was decidedly dovish. The RBA noted worsening market conditions in Europe, increasing unemployment, declining commodity prices, moderating Chinese growth, and falling inflation. Though the RBA decided to leave the cash rate unchanged for now, the Board remains open to the possibility of lowering rates in the future to assist economic growth.

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