The Reserve Bank of Australia (RBA) has keep its cash rate at 4.25 per cent following its February board meeting.
The decision surprised the market, as 13 of the 14 economists surveyed by AAP had said there would be a quarter of a percentage point rate cut on Tuesday.
The RBA cut its benchmark interest rate at both its November and December board meetings by a quarter of a percentage point each time, taking it to 4.25 per cent from 4.75 per cent.
The two consecutive cuts last year were made to maintain growth in the Australian economy in the face of pessimism about the European government debt crisis and its affect on the wider world economy and markets.
RBA governor Glenn Stevens said on Tuesday that acute financial pressures on banks in Europe were alleviated considerably late in 2011 following actions by eurozone leaders.
“Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made,” Mr Stevens said in the short statement that accompanied the interest rate decision.
“Financial market sentiment, though remaining skittish, has generally improved since early December.
“Share markets have risen and term funding markets have reopened, including for Australian banks, albeit at increased cost compared with the situation prevailing in mid 2011.”
Commonwealth Bank chief economist Michael Blythe said the decision to hold rates steady had come as a surprise to economists and markets.
“The Reserve Bank has an infinite capacity to surprise and today was no exception,” he said.
Mr Blythe said it appeared the combination of improved US economic data, positive signs from Europe and the stabilisation of markets had convinced the RBA to hold rates for now.
“I suppose it does highlight that they were somewhat reluctant rate-cutters at the end of last year.
“They have taken the opportunity, with a bit of a better turn in markets and some better looking global data, to sit on the sidelines and see how we’re actually placed.
However, he said a rate cut could come as early as March if Europe’s debt crisis took a turn for the worse.
“There is a very clear easing bias here, so it wouldn’t take much more of a renewed threat offshore to push them over the loan again in terms of cutting rates.
“Now we basically wait month by month, if we see those European fears re-intensify they will cut rates again.”
Macquarie chief economist Richard Gibbs said the central bank seemed buoyed by more optimistic news from the US, Europe and China.
“They’ve noted that signs from the US indicate that recovery is proceeding, and also in China, which looks to be having a soft rather than hard landing,” he said.
“Also they seem to be very convinced of the success of the European Central Bank in stabilising financial pressures on banks in Europe.
“Europe was one of the key catalysts for the rate cut in December but they certainly seem to think that those risks have dissipated somewhat.”
Mr Gibbs said that lower yields among European banks supported the idea that the region was now economically stronger than previously thought.
The release of better than expected US jobs data on Friday would have provided ample fuel to more optimistic outlook for the US, Mr Gibbs said.
“It continued the build-up there with the recovery in employment,” he said.
“It’s still a grinding recovery there but it continues to grind on.
“It opens up the prospect that we might have an unemployment rate under eight per cent (in the US) before the presidential election.”
Mr Gibbs said the RBA seemed to believe that the Chinese economy was progressing well, with strong a purchasing managers index figure for manufacturing last week suggesting a soft landing as sought to rein in inflation.
UBS interest rate strategist Matthew Johnson said the RBA decided keep the rate unchanged while it waits for more information.
He said the RBA would be waiting for more inflation data, which will come when the Australian Bureau of Statistics releases its March quarter consumer price index on April 24.
“They say a material change in the (Australian economic) growth outlook means that they will lower rates again,” Mr Johnson said.
“This makes the May meeting, the next one where the rate decision is probably live, if the unemployment rate starts pushing up again or there is a Greek (government debt) meltdown.”
“I think it’s quite possible that they are on hold for a couple of months.”
Mr Johnson said the recent encouraging economic figures from the US and progress made on alleviating the eurozone debt crisis has eased fears about global economic growth.
“The RBA notes there are still some big downside risks to Europe, and that’s Greece, but the data is looking pretty good, so I think they are on hold waiting to see how the data develops,” he said.
Mr Johnson said there was a sell off in the futures market following the decision.
“I don’t think the sell-off is done because the most likely reconsideration of their the RBA’s monetary policy will be in May,” he said.
The June 2012 Interbank cash rate futures contract was 96.210 (implying a yield of 3.790 per cent) at 1443 AEDT, down from 96.375 (3.625 per cent) before the RBA announcement at 1430 AEDT.
