Australia Pausing Rate Cut on European Progress Spurs Currency: Economy

Australia unexpectedly kept interest rates unchanged as two cuts late last year help the economy weather Europe’s debt crisis, sending the nation’s currency soaring to a six-month high.

“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made,” Reserve Bank Governor Glenn Stevens said in a statement today announcing the official cash rate target will stay at 4.25 percent, the highest level among the world’s major developed economies.

“Financial market sentiment, though remaining skittish, has generally improved since early December.”

Stevens’s first rate decision of the year reflects confidence the U.S. and Chinese economies will withstand a European recession and domestic unemployment will stay close to 5 percent as A$456 billion ($492 billion) in resource projects boost hiring.

He signaled today a willingness to lower borrowing costs if conditions warrant an easing of monetary policy.

“The bias is still to cut, that much is clear,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s biggest interdealer broker, who predicted today’s decision.

“But they’ve tied it to a weakening in demand, which is appropriate.”

From: Bloomberg