Australia keeps key rate at 4.25% and boosts the Aussie

By Francisco Miñana.

Date: Tuesday 07 Feb 2012

The Reserve Bank of Australia has decided to keep its official key rate at 4.25%.

The decision surprised market analysts, who were expecting a rate cut to 4%.

The Bloomberg consensus indicated that 24 economists were expecting a 0.25% rate cut and three were expecting no change.

Following the rate cuts in November and December, the RBA decided to pause in its monetary easing cycle, saying: “The acute financial pressures on banks in Europe were alleviated considerably late in 2011 by the actions of policymakers. Much remains to be done to put European sovereigns and banks on a sound footing, but some progress has been made.

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

Opinion:

According to the press release, Australian monetary authorities maintain a bias for monetary easing but decide to remain cautious. They will first see the effects of the recent rate cuts while they expect inflation to remain within the 2-3% target. The latest data shows that quarterly inflation is slowing to 3.1% from a peak of 3.6% reached in the second quarter of 2011. GDP is also slowing down from 3% to 2% year-on-year in recent quarters.

With the Fed, BOE, BOJ, and ECB flooding the market with additional liquidity through extraordinary measures, the Aussie has high demand from central banks and emerging countries due to its high returns.

After this decision, the Aussie dollar experienced significant strength against its major crosses. It is an attractive currency for carry trade operations.

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