Australia central bank shuts door on rate cuts, A$ surges

SYDNEY Mon Feb 3, 2014 11:11pm EST

A construction crane is reflected on the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013. REUTERS/Daniel Munoz

A construction crane is reflected on the Reserve Bank of Australia (RBA) building in central Sydney April 2, 2013.

Credit: Reuters/Daniel Munoz

SYDNEY (Reuters) - Australia's central bank kept its main cash rate at a record low of 2.5 percent on Tuesday as widely expected but surprised some by saying further cuts were not in the cards - dropping its bias towards easing policy.

The Australian dollar surged over half a U.S. cent after the Reserve Bank of Australia (RBA) also toned down its rhetorical campaign for a weaker currency, saying only that a recent decline would assist the economy if sustained.

"In the Board's judgment, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target," RBA Governor Glenn Stevens said in a brief statement.

"On present indications, the most prudent course is likely to be a period of stability in interest rates."

It had previously stated that it remained open to the possibility of another cut if needed. However, signs of an improving economy combined with a surprisingly high inflation reading last quarter had sparked speculation it would skip the easing bias this time.

"I think the most significant aspect in the statement is the fact it ends with the comment that 'the most prudent course of action is through stability in interest rates' so they seem to have moved more firmly into the neutral camp than they have been," said Shane Oliver, chief economist at AMP Capital.

"They do seem to have watered down the $A comment."

A Reuters poll of 21 analysts had found all expected the RBA to hold steady, while many argued the next move would be up rather than down, albeit not for many months yet.

The market had priced in almost no chance of a move this week and trimmed the probability of a further cut to just one-in five.

The central bank will have scope to expand on its reasoning in its quarterly economic outlook due on Friday.

NOT SO UNCOMFORTABLE

The RBA also dropped a reference to the Australian dollar being "uncomfortably high", which had been part of a long verbal campaign to pull the currency lower to benefit the trade-exposed sectors of the economy.

On Tuesday it stated only that: "The exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy."

The change could in part be due to a surprising acceleration in underlying inflation last quarter to an annual 2.6 percent, well above the 2.25 percent the central bank had forecast.

Stevens noted that the fall in the local dollar was feeding through to inflation more quickly than anticipated.

Yet, he added that while inflation was now likely to be somewhat higher than first thought, it was still expected to remain within the bank's 2 to 3 percent target over the next two years.

Low interest rates have been filtering through to higher house prices and home building, while boosting household wealth and giving consumers the confidence to start spending again.

The RBA started lowering rates all the way back in November 2011 and its last move was in August 2013.

Stevens made only passing reference to the recent turmoil in emerging markets and the recent slide in stocks.

(Editing by Eric Meijer)

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