Australia keeps interest rates steady at 4.25%

Reserve Bank of Australia governor Glenn Stevens said interest rates for borrowers had dropped to be “close to their medium-term average” after two rounds of rate cuts in November and December.

The United States was expanding moderately, offsetting weakness in Europe, and though China's growth had eased slightly Stevens said it “on most indicators remained quite robust through the second half of last year.”

“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,” Stevens said.

Analysts had widely expected the bank to cut rates for a third time following weak retail sales data released this week, and the Australian dollar surged on the announcement to 107.98 US cents from 107.05 prior.

Treasurer Wayne Swan said the bank's decision “struck a balance between global uncertainty on the one hand and Australia's strong economic fundamentals on the other.”

“The Reserve Bank is acutely aware of the challenges to our economy from the global situation,” Swan told parliament.

“They are pointing to the fact that domestic growth is strong.”

Stevens said “much remains to be done” to ease sovereign and bank debt strains in Europe but “some progress had been made” and financial markets, though skittish, were generally more positive.

“Share markets have risen and term funding markets have re-opened, including for Australian banks, albeit at increased cost compared with the situation prevailing in mid 2011,” he said.

Locally, jobs data was soft but the unemployment rate had held steady in recent months, with modest credit growth and house prices showing signs of stabilizing.

The Australian dollar continued to perform strongly and commodity prices had “risen somewhat” after several months of falling noticeably from their peaks.

Importantly, Stevens said inflation continued to ease as food price fluctuations related to last year's flooding and cyclones dropped away and was forecast to remain within the bank's 2-3 percent target in the medium-term.

“Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy,” said Stevens.

“The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.”

Macquarie chief economist Richard Gibbs said Australia's relatively low unemployment rate of 5.2 percent was the key factor behind the bank holding fire.

“They've also drawn quite a bit of comfort from the macro economic data front with the U.S. and China,” said Gibbs. “They see a more stable global financial environment.”

Mining-powered Australia was the only advanced economy to dodge recession during the global downturn due to the resilience of its resources exports to Asia and it was among the first to begin hiking rates.

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